Fuel relief

The government's latest effort to bring down fuel prices revises the petrol pricing mechanism by asking oil refineries to absorb the difference between import and ex-refinery prices through a petroleum levy. But while the immediate effect is expected to lower prices, the move carries several potential risks, raising concerns among analysts.

Unfortunately, the government is running out of options, and with the US-Israeli war on Iran sending international prices soaring, there are only a few measures available to keep the prices down without trampling on the bottom lines of fuel companies. The new arrangement, approved by the federal cabinet on Oct 30, will see refineries surrender the price differential, allowing petrol to be sold Rs15 cheaper than global market rates and sparing motorists a punishing blow. The measure will, in theory, also help reduce inflation, as prices depend on transportation costs, which are directly tied to fuel prices.

With refineries collectively bearing a burden of approximately Rs15 billion each month, this additional load could push gross refining margins into negative territory. Industry officials argue the policy was changed without prior consultation, forcing them to sell petrol below production cost and creating regulatory uncertainty that may discourage future investment. The government's own figures reportedly put the surrender at Rs49 per litre, which is significantly higher than the Rs15 number being thrown around. The government's justification is largely based on the fact that oil companies have earned excess profits due to price fluctuations in recent months.

But even though oil companies are rarely deserving of anyone's sympathy, they do have a valid complaint in that the difference between import and ex-factory prices is not all profit, and converting the entire amount into a levy is effectively forcing them to operate at a loss due to the failure to account for salaries, overheads and other expenses. Reducing prices at the pump is useful, but it is a short-term goal. A better strategy would have been to heavily tax the excess profits and use the funds to bridge budget gaps.