OCAC backs old price mechanism

Urges OGRA to revert to old methodology that considered prevailing dollar rate

ISLAMABAD:

The oil industry has called for reverting to the old methodology of price revision based on the current value of dollar indexation.

In a letter written to the Oil and Gas Regulatory Authority (Ogra) chairman, the Oil Companies Advisory Council (OCAC), a lobbying group of oil industry players, called for re-establishing the old mechanism where the current dollar rate was taken into consideration.

“We are writing regarding the exchange rate computation methodology used for calculating fortnightly prices of petroleum products. Our request is to revert to the previous methodology, thereby returning to a simpler and clearer process,” the OCAC stressed.

In the past, it added, the exchange rate applicable at the time of pricing was used for the computation of petroleum rates.

“However, effective from August 1, 2022, Ogra changed its methodology. Instead of using the latest available exchange rate, Ogra shifted to a 15-day average exchange rate, despite reservations from the oil industry. This change created exchange rate exposure for the oil industry,” the lobbying group said.

“We understand that using the latest available exchange rate at the date of price change reflects the exchange rate for the upcoming fortnight and would be a better option compared to the current practice of using a 15-day average exchange rate.

“Since the Pakistani rupee has currently stabilised, the impact of correcting the pricing mechanism will be negligible. Therefore, we propose reverting to the system of using the exchange rate applicable at the time/ date of pricing change.”

OCAC sought support for implementation of the recommendation and expressed its willingness to present the proposal in person.

In the past, then finance minister Ishaq Dar used different tactics to keep petroleum prices at lower levels. It was his idea that oil price calculation should be based on the average exchange rate rather than the exchange rate at the time of price revision. At that time too, the OCAC raised the issue but the then Pakistan Democratic Movement (PDM) government turned down the request.

Now, Prime Minister Shehbaz Sharif-led government is again in power, prompting the OCAC to take up the matter with Ogra for its resolution.

Increase in margins

Separately, the petroleum dealers association has approached Finance Minister Muhammad Aurangzeb, asking him to increase margins on oil sales.

“This is to bring to your attention that last time the petroleum dealer’s margins were increased in September 2023. Since then, we have experienced a significant rise in various operational costs, including electricity charges, interest rates, labour costs, franchise fee of oil marketing companies and Kibor (Karachi Inter-bank Offered Rate),” the association chairman said in a letter.

“Despite our best efforts to adhere to all statutory requirements and operate compliantly, the existing margins have rendered our earnings unsustainable.”

Additionally, the rampant influx of smuggled petroleum products has dealt a severe blow to both the country’s economy and the registered petroleum dealers.

“While we diligently uphold our commitments and investments, the prevalence of smuggled products at lower prices has led to a drastic decline in petrol pump sales up to 50%,” he said, adding that this detrimental trend not only undermined the petroleum industry but also posed a grave threat to the overall economy.

Given the complexity
of the situation, the association appealed for a prompt resolution of the dealers’ grievances to enable them to sustainably operate the industry.

It cautioned the government that failure to address such pressing issues may leave them with no choice but to cease operations, which would have adverse implications for their businesses as well as the broader economy.

Published in The Express Tribune, March 26^th, 2024.

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