Oil price relief

Fuel prices in Pakistan are still among the lowest in the world for countries that are net importers of oil


Editorial May 02, 2020

The government has approved massive cuts in fuel prices, with a litre of diesel going down by over Rs27 and petrol getting Rs15 cheaper. Diesel will now sell for Rs80.10, and petrol for Rs81.58. Amazingly, the cuts are still below what the Oil and Gas Regulatory Authority (Ogra) had recommended. The regulator had suggested dropping diesel prices by almost Rs34, and petrol by Rs21. These would have amounted to reductions of around 32% and 21% respectively, which are still below the amount by which the international oil prices have fallen.

Prices, of course, have crashed due to an unprecedented fall in global demand thanks to the global Covid-19 coronavirus pandemic and the lockdowns imposed to level its infection curve. Demand fell so much that at one point West Texas Intermediate, the oil standard in the US, fell over 300% in a single day and went into negative territory before rebounding slightly, with dealers literally paying around $37 a barrel to get the black gold off their hands. Pakistan, like much of the world, relies on Brent Crude, which also fell dramatically in the past few weeks, although not as much as WTI. Brent prices have dropped more than 50% over the last month.

Even ignoring such anomalies, the rate of decline has been such that even countries that allow more frequent price changes based on international oil price trends have struggled to keep pace. In Pakistan’s case, the problem is two-fold. The country remains dependent on indirect taxes such as those on fuel. Lowering fuel prices too much also means lowering government revenues, which are also in a precarious shape due to additional outlay on coronavirus stimulus and tumbling incomes due to reduced economic activity. Another problem is the rupee crash against the dollar. After stabilising somewhat over the winter, the rupee is down more than 3% against the greenback since March, and at one point had fallen almost 9%. That has caused the cost of imports to rise sharply and fueled further inflation.

Despite this, fuel prices in Pakistan are still among the lowest in the world for countries that are net importers of oil. Unfortunately, so are incomes. 

Published in The Express Tribune, May 2nd, 2020.

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