Oil supply crisis

Petroleum Minister Omar Ayub Khan has accused oil companies of profiteering and threatened to cancel their licences while denying there is a fuel shortage. But oil companies accuse the government of canceling oil imports when prices were dirt cheap because of the currency reserve crunch brought on by hot money flight after the Covid-19 pandemic started. This is the same hot money crisis that competent economists had warned about when the government began its devil-may-care strategy to bolster sinking currency reserves many months ago. In April, India told state-owned oil firms to bolster reserves when global rates fell to a two-decade low. We slashed imports. That in itself is a damning indictment of the government’s planning.

And as the government tries to blame the ongoing fuel crisis on oil companies, reports are emerging that this is another attempt to pass the buck. One such report suggests the blame should actually be placed on the ECC for rejecting a new price mechanism proposed by the Petroleum Division. While the math is somewhat complicated, the most significant change would have been to allow refineries to adjust prices every two weeks instead of once a month, protecting them from price fluctuations. Due to lower prices during the previous month-long base period, the refineries chose not to produce rather than lose money.

While on the face of it, this would play into the government’s claim that oil companies are profiteering, there is a problem with that argument. If the oil companies were, as they claim, unable to cover the cost of production at the government’s price, there is no reason for them to produce. Shutting down then becomes a loss-reduction strategy. The government can’t tell them to become loss makers just to make itself look good. This approach is summarised by the finance ministry openly saying the government was cutting fuel prices “despite the global trend of increasing POL prices”. The government could do several things to make life easier for people, but forcing private businesses to run losses to achieve this should not be an option.

Published in The Express Tribune, June 9^th, 2020.

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