Deregulation of oil prices

For the longest time, the government of Pakistan has displayed an extraordinary inability to understand the power and dynamics of international commodity markets, an ignorance that has had disastrous consequences on its effort to regulate the energy industry. Yet with the decision this past week to deregulate the energy industry, particularly its pricing mechanism, is finally an acknowledgement that the government should not be in the business of fixing prices in the first place.

According to newspaper reports, the government has made the decision to remove the power of the Oil and Gas Regulatory Authority (OGRA) to set prices, revising OGRA’s mandate to primarily concern itself with price manipulation instead. This is a much more sensible role for the regulator and has the added advantage of removing the government from the role of being the harbinger of bad tidings every time prices go up.

Among the consequences of this decision is the removal of the inland freight equalisation margin which is a mechanism by which fuel prices are kept uniform throughout the country regardless of the cost of transportation. This removal will cause prices of petroleum prices to be cheaper in the south of the country than the north. So while much of the country can expect lower prices at the pump, the residents of Gilgit-Baltistan will face higher prices of fuel. While this is indeed regrettable, some analysts argue that this is a temporary phase and that the deregulation will encourage more investment in refineries in the northern part of the country and will eventually allow prices to stabilise.

While the decision to let the market set its own prices — with the government keeping a watch on manipulators — in the oil sector is a good measure, it does not go far enough. The government must now do the same with regard to the National Electric Power Regulatory Authority for the power segment of the energy chain. Only then can the country expect to invest its way out of the energy crisis.

Published in The Express Tribune, June 21^st, 2010.