Time may have come to make diesel cheaper than gasoline

Lower diesel prices can play key role in reducing production cost, making exports competitive

SYED AKHTAR ALI November 12, 2018
A representational image of fuel pumps. PHOTO: REUTERS

ISLAMABAD: Petroleum Minister Ghulam Sarwar Khan, in his first meeting with his ministry officials, said something very seminal about the current petroleum pricing policy.

He said high-speed diesel (HSD) should be cheaper than gasoline (petrol). I have long held this opinion but did not speak vehemently due to revenue constraints faced by various governments.

HSD consumption used to be much higher than gasoline in Pakistan and used to be a revenue earner as both higher taxes and high sales fetched more revenue. Things have changed over the years. It appears that time has come to change the pricing policy, making HSD cheaper or at least equal to gasoline prices.

Generally, HSD is priced lower than gasoline in most countries of the world because of the simple reason that public transport of people in buses and of goods in trucks use diesel, lowering transportation costs and prices.

Same is the case in the countries selected for the table. Only five out of 20 countries have lower or equal gasoline prices than diesel which include Pakistan, the UK, USA, Indonesia and Australia. Even there, USA has equal prices and UK HSD prices are only 1.75% higher.

In Pakistan, HSD prices are 16.30% higher than gasoline. In India, HSD prices are the opposite - 11.76% cheaper than gasoline prices. In Bangladesh, the difference is even higher at 35.90%. In Thailand, the difference is 27.78%.

Typically in Europe, the HSD-gasoline price difference varies between 6% and 23%. This is despite the fact that HSD is more polluting than gasoline and environmental considerations are at very high levels in European countries.

However, it appears that social policy has traditionally been higher in the European agenda - very high taxes on petroleum and higher on gasoline than on diesel, the latter being predominantly used by personal cars.

It may be noted that in Europe, on average, petroleum is twice as expensive as in developing countries.

It appears that there has been no particular long-term trend in the petroleum products pricing policy in Pakistan. HSD used to be cheaper between 2005 and 2008 by almost 27% to 50%.

HSD in 2005 was priced at Rs26.21 per litre against Rs40.39 for gasoline. Similarly in 2008, HSD price was Rs55.15 vs gasoline price of Rs75.69. However, reverse became the case in 2010 and onwards, when HSD became expensive by 10-16%.

The reason for higher HSD prices is higher taxation. For example, in the last price announcement, the sales tax on HSD was Rs19.22 per litre. What is the solution for making HSD cheaper? Reverse the taxation gradually, though it may be politically very difficult as gasoline is consumed by a vocal and powerful consumer class consisting of rich, poor and the ones in between.

Another point is worth noting. Laymen generally complain that petrol prices are higher than those in India and Bangladesh, which is not true and probably has never been the case. At least, petrol prices have always been quite lower in Pakistan than in these two countries.

Gasoline prices in Pakistan are 48% lower than in India and HSD prices are also lower. HSD prices are, however, higher in Pakistan than in Bangladesh by 15.22%. Gasoline price is way lower than Bangladesh’s by 37%.

Sri Lanka appears to have what can be called a desirable balancing between HSD and gasoline prices and almost opposite to that of Pakistan - Rs116.69 for gasoline in Sri Lanka which is closer to Rs111.16 for HSD in Pakistan and Rs92.6 for HSD in Sri Lanka which is closer to gasoline prices in Pakistan of Rs96.88.

Consumption patterns

Another trend is worth noting about gasoline vs HSD. Gasoline consumption has been growing very fast over the last decade and it continues while HSD consumption has almost stagnated. Gasoline consumption in 2007-08 was only 1.5 million tons, which is now more than 6.1 million tons. The gasoline growth rate has crossed the limit of 20% per year.

HSD consumption used to be 8.2 million tons and is almost the same now a decade later. Perhaps, the increase in motorcycles and Suzuki loaders has something to do with it and the industrial sector, inter-city movement and commerce have stagnated.

One thing is clear now that revenue imperatives and impact are almost the same – one can tax either without losing revenue any significantly.

What is the moral of the story? Firstly, there is a room for some increase in gasoline prices and decrease in HSD prices. Secondly, some more revenue can be generated from this sector so long as crude oil prices do not cross $100 per barrel.

However, there may not be a lot of space in price manoeuvring as gasoline is also used in transportation in Pakistan and the low income group uses gasoline in motorcycles.

However, there would be a positive effect on the economy and inflation if HSD prices are kept lower than gasoline. It may be noted that the consumption of HSD and gasoline has almost become equal and both can serve as a vehicle of revenue earning in equal terms.

The issue is quite complicated, however. In India, electricity prices are lower and quite lower than in Pakistan. There is lower electricity tariff for the low income group, despite that average selling prices are lower.

Gas prices in India are higher than in Pakistan, although this is due to undue delays in gas price adjustment. After expected price adjustments, the gas tariff in Pakistan and India would become comparable.

The problem can be solved by introducing a cheaper gasoline product for two wheelers, three wheelers and locally produced vehicles of below 1,000cc. A RON-87 gasoline product with some other additive will meet the need. There should be a separate and cheaper tariff for this fuel.

A gasoline product for newer vehicles driven by the affording and higher income group with RON-90 or above should be there with a tariff higher by Rs10 than the cheap gasoline proposed earlier. This will also make HSD cheaper than gasoline.

Concluding, time has come to bring innovative changes to the energy policy to include the above proposal. To meet the challenges of rising current account deficit and falling exports, the reduction in diesel prices can play a significant role in reducing the cost of production and make exports competitive, although many small steps would be required to achieve the goal.

Oil refineries

There are other issues in the energy policy of misdirected capital investments such as in oil refineries. The refineries are capital-intensive and hardly create employment. We need employment expansion badly to avoid social unrest as we are experiencing a mounting pressure in this respect.

Besides, oil refineries are low margin and high-scale economy businesses. India has installed an oil refinery of more than a million barrels per day recently. The days of smaller refineries are gone. Besides, it hardly saves any foreign exchange as it shifts imports to crude oil.

This sector is beset with transparency issues. Used refineries with outdated technology are imported and relocated here, producing polluting high sulphur petroleum products. There are many other areas waiting for much required investments.

The writer is former member energy of the Planning Commission


Published in The Express Tribune, November 12th, 2018.

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