Pakistan's petrol crisis: Structural impediments

Pakistan spent $14.4 billion and $10.4 billion on imports classified under the petroleum group in FY19 and FY20 respectively, according to the Pakistan Bureau of Statistics.

Approximately 57% of petroleum oil is used for transport. Petrol prices in Pakistan fluctuate every month as the Oil and Gas Regulatory Authority (Ogra) recommends prices by following the international oil markets, which are then approved by the government. In June 2020, we witnessed the largest increase in petrol prices, causing agony for consumers but resulting in a windfall for sellers – and the government. Before we go into this, a quick chronology of events need to observed.

On May 31, the government slashed the petrol price by Rs7 per litre, to bring the retail price down to Rs74.52 per litre. A couple of days later, petrol shortage emerged across the country, except for state-operated Pakistan State Oil (PSO) outlets. On June 9, the prime minister directed officials to take stern punitive action against those responsible for the artificial shortage of petrol in the country.

On June 11, Ogra penalised six oil marketing companies (OMCs) with a fine of Rs40 million in total. The supply situation remained unchanged.

On June 26, the government announced an increase in petrol price of Rs25.58, the largest increase ever. Petrol supply returned to normal within hours. As per a statement by an OMC spokesperson, an abrupt increase in petroleum demand was one reason behind the depletion of its stocks. However, Ogra contended that there was no shortage of petrol in the country.

The federal cabinet alleged that OMCs pocketed windfall gains when oil prices were high but were reluctant to bear losses when prices went down.

The Federal Investigation Agency (FIA) issued summons to three OMC heads over suspicion of fuel hoarding to create artificial shortage of petrol in the country.

Many believe that the OMCs have colluded. While this warrants a detailed examination by the Competition Commission of Pakistan, it looks implausible as 50% market share in petrol supply is within the hands of the government through PSO and it is also an integral part of price setting as an OMC.

Since the government is part of the sellers, and is the largest market player, the market-wide collusion is impossible. In fact, one needs to consider the windfall revenue that accrued to the government through a sudden price spike and additional tax revenue. Out of every Rs100, a consumer pays today to buy petrol, he pays Rs45 to the government in the form of petroleum levy (Rs30) and sales tax (Rs14.55).

In April 2018, when crude oil prices were almost double the current levels, this levy was only Rs10. Thus, the government, through its ownership of PSO and petroleum taxes, seems to a major beneficiary from the biggest increase in petrol price at the cost of consumers.

What we need to do?

First, any alleged cases of cartelisation, abuse of dominant position and collusion should be taken up by the Competition Commission of Pakistan and not by the likes of FIA.

Second, the government may consider lowering the high incidence of indirect taxes on petrol to provide relief to consumers and a ceiling on the maximum levy should be observed strictly.

Third, as Planning Commission’s former member energy Syed Akhtar Ali argued, the government should allow independent fuel retailers to operate and should bring all outlets under the umbrella of regulation. These outlets should be allowed to either associate themselves with any OMC or to operate as independent dealer-owned, dealer-operated retail stations to boost competition.

Fourth, the OMCs should be given powers to determine their own retail prices. Currently, Ogra imposes cost-plus pricing, where the crude oil procurement cost is determined by the regulator and a fixed profit margin in rupees/litre is added to it. In a competitive market, the OMCs would be incentivised to procure at cheaper rates. Fifth, rather than Ogra determining import costs, the OMCs may be allowed to negotiate their own contracts, so that better-quality oil can be imported more efficiently.

This is not for the first time we have witnessed petrol shortage. What is important is to draw right lessons from this crisis and improve policy as well as process.

The writer is the founder of independent think tank PRIME

Published in The Express Tribune, July 20^th, 2020.

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