The Economic Coordination Committee (ECC) is likely to approve an increase of up to 25.2% in margins of oil marketing companies (OMCs) following protest from petroleum dealers.
In a study, the Pakistan Institute of Development Economics (PIDE) presented four proposals related to the increase in margins of OMCs and petroleum dealers.
PIDE assumes that 50% of the cost of dealers is affected by inflation whereas the remaining 50% is impacted by other factors.
Therefore, in its first option, PIDE recommended linking 50% of margins with the Consumer Price Index (CPI) and increasing the margins annually.
The other 50% of margins should be revised every two years based on an analysis of data obtained from the petroleum dealers and OMCs, it said.
Under the second option, it suggested a revision in margins of petrol and high-speed diesel as a percentage of prices of petroleum products. The approach in this option is to automatically adjust margins of petroleum products.
If this option is adopted, the margins will increase with the increase in petroleum product prices and can have serious financial implications for the consumers.
Under this option, PIDE called for fixing a cap and a floor to keep margins balanced.
Under the third option titled “Deregulation of OMCs and dealers’ margins”, PIDE stated that the downstream industry had become competitive with 34 OMCs, hence, the sector should be deregulated.
Discounted cash flow
This approach takes into account the discounted cash flow for a standard operation with adjustment and discounting factors based on the CPI (June 2021: 8.66%) and risk-free rate of return (9%) as the opportunity cost of investor.
The study proposes that the compound deficit in OMCs and dealers’ margins over the last five years (2017 to date) should be addressed by a rational increase.
This will cover the inflationary impact on the operational cost and provide a reasonable relief to the OMCs and dealers while securing the interest of consumers.
If the government accepts this option, there will be an increase in margins of 23.32% on petrol and high-speed diesel.
The existing margin on petrol will go up from Rs2.97 to Rs3.68 per litre and on high-speed diesel from Rs2.97 to Rs3.68 per litre for the OMCs.
In the case of petroleum dealers, there will be an increase of 25.2% in margins on petrol and high-speed diesel.
The margin on petrol will increase to Rs4.9 per litre against Rs3.91 at present and on high-speed diesel from Rs3.30 to Rs4.13 per litre.
In light of this, the Petroleum Division has asked the economic decision-making body to increase OMCs and dealers’ margins on petrol and high-speed diesel by 23.32% and 25.20% respectively, which could be implemented with the upcoming revision in oil prices.
The margins will remain effective within the band of $60-100 per barrel average monthly and fortnightly international crude oil price as published in the Arab Gulf Platts, which may be revised with approval of the ECC in case the price fluctuates out of the band.
Published in The Express Tribune, November 23rd, 2021.
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