Cheaper petrol for the poor

Affordable low octane fuel can be introduced for poor motorcycle and old car users

ISLAMABAD:

Petroleum product prices have been reduced by the government despite rising international prices, which first crossed $100 per barrel mark and have now approached $130. The issue has been compounded by the Ukraine conflict.

In Pakistan, petroleum prices have been and are the lowest in the region. Petroleum product prices have been reduced by Rs10 per litre. Gasoline and diesel prices, after the recent reduction, are at Rs150 per litre and Rs144 per litre.

The lower petroleum prices have been possible by reducing the petroleum levy to almost the negligible level (Rs1.81 on gasoline and Rs3 on diesel), while GST has already been reduced to zero earlier.

In US dollar terms, the comparative gasoline prices per litre are: Pakistan 0.855, Sri Lanka 1.025, Bangladesh 1.035, India 1.366 and the benchmark US price is 1.044.

Corresponding diesel prices are: Pakistan 0.823, Sri Lanka 0.599, Bangladesh 0.930, India 1.192 and the US 1.061. Except for abnormally low diesel prices in Sri Lanka, Pakistan prices are significantly lower.

Price reduction has generally been appreciated by the people, especially the poor, while critics have termed it unsustainable. The government may have provided up to a certain level of oil prices but it cannot possibly afford to absorb them indefinitely and so the people as well.

There are three reform proposals that the government may have to design and implement in the petroleum sector – cross-subsidies for the poor, petroleum rationing for high price periods, and lower diesel prices than gasoline via cross-subsidies vis-à-vis gasoline.

We have discussed the rationing issue earlier in this space. However, it may be worth reminding it here as well. Even if the government absorbs high prices in its budgetary resources, what can it do to handle the foreign exchange drain? Imports by value can increase by 30% or more. Hence, a contingency plan for rationing may be required.

Voluntary rationing followed by mandatory one may have to be introduced. Initially, public and private sector companies may be obliged to rationing. In the days of computers and NADRA, it should not be difficult to administer rationing.

Just in passing, lower diesel prices than gasoline is a universal practice to support public and goods transportation, bringing in both welfare and economy-wide competitiveness. However, this can be implemented only when there is some level of taxation, which is not there now.

Let us now discuss the proposal of cheaper petrol for the poor. In this price reduction, the rich are free riders. This cannot continue for long.

The reduction is essentially meant for the non-affording consumers and not for those who drive expensive vehicles costing Rs1.4 million to Rs5 million or even more.

In Pakistan, there has been quite a considerate pro-poor tariff policy in the energy sector, as is indicated by the very low tariff slabs for the small consumers, who happen to be poor.

At least part of the rise in circular debt both in the electricity and gas sectors has been due to this subsidised tariff. The petroleum sector, for a variety of good reasons, could not introduce a pro-poor differentiated pricing. The most important has been the lack of a suitable product differentiation.

In case of electricity and gas, the lower income groups are identified as per consumption quantity slabs. The assumption is that the poor and low-income groups consume less, and thus lower price slabs are identified accordingly. In case of gasoline, no such consumption-based pricing system is possible.

Subsidy for bike users

Reportedly, the government is considering some kind of subsidy for the motorcycle users, which are mostly poor or fall in the low-income group.

There are around 30 million motorcycle users consuming some 40-50% of the total gasoline consumed in the country. Thus, there appears to be an identifiable population, which can be given the benefit of subsidies.

There are two possible approaches – one is to transfer the subsidy amount through the Ehsaas programme. Ehsaas intervention may be rather difficult for 30 million users and their motorcycle registrations.

Our proposal is to provide subsidy by introducing a separate brand of gasoline under a low-octane system.

Currently, RON-95 and higher octane are available in Pakistan. This change has been made only recently. Earlier, up to 2020, it was RON-92, and up to 2017, it was RON-87.

Higher octane (RON) fuels are required by new and modern vehicles having the electronic ignition system. Older vehicles and motorcycles having the carburetor system can do at lower octane levels.

Our proposal is to introduce a low octane fuel of RON-87 for the poor motorcycle and old car users.

It would be easier and cheaper to market such a fuel product. Our existing refineries produce RON-87 gasoline as a standard product.

They add environmentally injurious additives like manganese compounds to enhance the octane rating to 92 or higher, which costs more money and consumes vitally needed foreign exchange.

All we are saying is not to add this injurious additive; the latter may be necessary for cars but is not required for motorcycles. Nothing extra has to be done. In fact, an environmentally more benign product will be there. What is so wrong about that?

A Rs10-20 per litre cheaper petrol product can be targeted for motorcycles. Additives cost of Rs5 per litre or more can be done away with – and also lesser taxation in the form of no or lesser petroleum levy and possibly reduced GST.

The deemed duty of 7.5% on diesel can also be shifted to the conventional gasoline of RON-95 and upwards, creating space for the proposed low octane gasoline.

This shifting of deemed duty would create a balance that is heavily tilted against diesel, which is consumed by goods transport and public transport used by the poor.

Some leading and renowned Pakistani experts are supporters of these proposals. As usual, locals’ proposals are not appreciated or valued much. So let me quote from a leading international petroleum advisory group.

“Lower octane grades, with octane number lower than RON-90 or AKI 85, are still available for use in motorcycles, very old vehicles or off-road applications such as fishing boats, agricultural machinery or small spark-ignition engines of non-road mobile machinery (NRMM). They are continued to be used primarily in the developing regions of Africa, Latin America, Russia & CIS and parts of Asia-Pacific and the Middle East. For example, in Indonesia, RON-88 is used primarily by motorcycles. Low octane gasoline grades fully dominate the gasoline pools of Bolivia and Yemen, while they account for the majority of gasoline pools in Colombia, Ecuador, Egypt, Iran and Indonesia.”

As for the remaining richer or affording gasoline (hi-octane) users, it appears that there is a scope for higher taxation and pricing, keeping in view the difference between gasoline prices in India and Pakistan – India PKR 243 per litre, Pakistan PKR 150.

This is the class which buys cars in the range of Rs1.4-4 million or even higher. It can certainly pay more. The surplus from this category can finance the petrol price subsidy for the poor motorcycle users and the diesel.

However, so long as the Ukraine conflict and the associated international issues continue, there is very little any government in the world can do about petroleum prices, except for controlling consumption and rationing.

The writer is former member energy of the Planning Commission and author of several books on the energy sector

 

Published in The Express Tribune, March 14^th, 2022.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.