Strike threat

The trade group for petrol pump operators is threatening to go on strike in two weeks unless the government accepts their demand for almost doubling their allowable profit margins. The amount is currently set at 3.5%, while the trade group is demanding it to be raised to 6%, insisting that pumps are not profitable below this rate. Similar demands were made last year when the PTI was in power, but the operators happily walked away with increases of less than Rs1 on each petroleum product — well under 1% — as opposed to the 6% they were demanding then. This suggests that the much larger increase demanded right now is also a bluff.

The truth is that while incentives and behaviour modification can reduce demand by a bit, fuel demand is mostly inelastic, meaning that pump operators are unlikely to run losses due to international price changes, although their profits may take a hit. At the same time, despite significant declines in demand in the month of June due to price hikes and government austerity measures, demand had consistently been rising for several months since the end of Covid-19 lockdowns, meaning that profits were also steadily increasing.

The real problem on the horizon is the risk of the fuel supply chain falling apart, as the country’s financial problems have led to several international banks refusing to accept letters of credit issued by Pakistani banks, which could cause importers to cancel or reduce orders. If a domestic shortage does take hold, the results could be disastrous for consumers, as it would lead to long lines at the pump and, very likely, fuel rationing. The situation would also be aggravated by the fact that domestic consumers are last in the priority line, behind power plants, industry and public transport. This is also a much bigger threat for pump operators as it would lead to a drastic reduction in sales, and since fuel prices are fixed, it is unlikely that they would be able to hike overall prices by enough to compensate for the difference.