Petrol prices to fall Rs3.38/litre

The prices of high speed diesel and petrol will fall Rs1.84 per litre and Rs3.38 per litre, respectively, in Karachi after the removal of inland freight equalisation margin (IFEM), according to an analyst.

On the other hand, prices of high speed diesel and petrol will increase by Rs2.88 per litre and Rs1.50 per litre in Chitral.

The Economic Coordination Committee (ECC) of the Cabinet on July 2 abolished the inland freight equalisation margin formula, adopted in 1992.

Fuel prices in the south will now be lower compared to northern regions of the country after abolition of inland  freight equalisation margin.

The margin was used to maintain uniform price across the country of petroleum products.

Sales in the south of the country will increase at the expense of sales in the north as transporters on highways will prefer refueling in the south where fuel will be cheaper, said BMA Capital analyst Muhammad Ali Taufiq in his research report on Tuesday.

Sales volume impact

“Consumers in all big cities will benefit from deregulation of IFEM because the prices of high speed diesel and petrol will be reduced at majority urban depots,” said Taufiq.

Lower fuel prices in urban areas will boost volumetric sales while total volumetric sales will also increase as lower price differential between CNG and petrol in the urban areas will encourage CNG consumers to switch to petrol, added Taufiq.

Competition dynamics

Deregulation of IFEM will change market dynamics in all the provinces.

None of the oil marketing companies (OMCs) in Punjab will have a competitive advantage, hence players may start a price war to gain market share, however PSO’s dominance in the region would allow it to be at the forefront.

Leading players in Sindh - PSO, Shell and Caltex - may decide to keep one price in the province and set up barriers for entry of other oil marketing companies.

In any case, level of competition among marketing companies and refineries is likely to increase given that cartelization is controlled by Competition Committee of Pakistan (CCP) and Oil and Gas Regulatory Authority (Ogra), said Taufiq.

Competition will encourage refineries and OMCs to use the cheapest mode of transportation which will result in lower consumer prices, he further said.

It would also curb malpractices related to tax refunds, sale of fake products and dumping, Taufiq added.

Published in The Express Tribune, July 7^th, 2010.