Reduction: Government cuts fuel prices to stave off pressure
Slash attributed to $13 per barrel decrease in prices in Gulf market
ISLAMABAD:
In a bid to stave off mounting political and economic pressure, the federal government on Friday resorted to one of the oldest tricks in the book by introducing hefty fuel price cuts.
The hastily crafted pricing strategy – coinciding with this week’s heavy fluctuation in global oil prices – offers consumers price cuts of up to Rs14.68 per litre. The decrease in prices will be effective from today (November 1).
The highest cut was seen in the price of HOBC, which is largely used by luxury cars. Other petroleum products such as petrol, HSD and kerosene oil were lowered to a significant level. The price of petrol has been slashed by Rs9.43 per litre. This is the third consecutive price drop for petroleum in as many months.
However, Dr Nadeemul Haq, a former deputy chairman of the planning commission, believes that the economy will not benefit much due to the failures of successive governments in bringing up economic reforms. “The present government is also doing its business by depending on borrowing and no major economic reforms have been made to boost the economy.”
On Friday, the Oil and Gas Regulatory Authority (Ogra) certified the latest changes through a notification. According to the notification, the price of high speed diesel (HSD) has been reduced by Rs6.18, kerosene oil Rs8.16, light diesel oil (LDO) Rs8.04 for the month of November.
The regulator has notified the new price of petrol at Rs94. 19 per litre, kerosene oil Rs87.52 per litre, HOBC Rs116.45 per litre, HSD Rs101.21 per litre. The new price of LDO, mainly used in industry, will be Rs83.37 per litre.
The move to slash fuel prices was taken in view of a $13 per barrel decrease in the price of crude oil in the Gulf Arab market.
Not so positive after all
The government charges 17 per cent GST on petroleum products and it would be losing a major chunk of revenue due to the cut in oil prices. At the same time, it collects Rs20 billion on account of GST and Rs10 billion on account of petroleum levy (PL) every month. “The government will lose around Rs1.5 billion in revenue due to the decrease in oil prices during November,” said an official at the petroleum ministry.
To a certain extent, the oil industry itself stands to lose, as it will be facing inventory losses due to the cut in oil prices. However, the government on Thursday raised its margins to bail it out.
Still industry officials claim that since CNG stations mostly remain closed in areas of Punjab, oil price cuts would facilitate consumers and also result in higher sales of petroleum products.
The transport and agriculture sectors are also among major users of oil and oil price cuts would facilitate the farmers and consumers. But in Pakistan, the regulation of the transport sector is very poor and people are not hopeful that they would be given a major relief in fares. In remote areas, petroleum dealers are also out of control of the oil regulator and oil marketing companies as they overcharge the consumers.
Truth about lower prices
The boom in shale oil production in United States apparently leads to a lowering of oil prices in the global market — which transforms into relief for the local consumers and pushes the economy. However, experts are uncertain to predict whether this trend will continue in the future or not.
OPEC usually halts oil production during such times to maintain the oil prices but this time around they made no such intervention and the supply to global market continued.
Some experts are of the view that energy supply to China and India has not increased and, therefore, a major drop in oil prices has been witnessed.
According to experts, the tussle between the US and Russia over Ukraine issue appears as a major reason behind the cut in oil prices, while OPEC giants like Saudi Arabia and Kuwait did not reduce their production to push oil prices.
They argue that Russia is also a large exporter of oil, which exports 9 to 10 million barrels oil. The US and Middle East countries have joined hands to hit Russia by lowering oil prices, experts claim.
However, amid this entire tussle between the giants, developing countries like Pakistan will benefit from this decline in oil prices. Pakistan is an oil importing country and pressure on its foreign exchange will also ease due to the price cut.
“The cut in oil prices is significant for the economy of Pakistan which would lead to lowering the cost of doing business,” said economist Dr Saboor Ghayoor. He expects economic activity to get a boost following the cut in oil prices.
Pakistan also relies on fuel when it comes to power generation and a drop in oil prices will lead to a reduction in power prices. Currently, the government has been keeping power production at a low level to avoid the subsidy — reduction in oil prices is likely to encourage the government to enhance power production. However, experts believe that it will depend on lowering of oil prices for a longer time.
“Global oil prices will not drop further as they will stop at $80 per barrel,” said former finance ministry adviser Dr Ashfaque, adding that US has become an oil exporter now and the economy of its shale gas would deteriorate if oil prices come down further. He added that oil prices have jumped down by 25 per cent since June.
Published in The Express Tribune, November 1st, 2014.
In a bid to stave off mounting political and economic pressure, the federal government on Friday resorted to one of the oldest tricks in the book by introducing hefty fuel price cuts.
The hastily crafted pricing strategy – coinciding with this week’s heavy fluctuation in global oil prices – offers consumers price cuts of up to Rs14.68 per litre. The decrease in prices will be effective from today (November 1).
The highest cut was seen in the price of HOBC, which is largely used by luxury cars. Other petroleum products such as petrol, HSD and kerosene oil were lowered to a significant level. The price of petrol has been slashed by Rs9.43 per litre. This is the third consecutive price drop for petroleum in as many months.
However, Dr Nadeemul Haq, a former deputy chairman of the planning commission, believes that the economy will not benefit much due to the failures of successive governments in bringing up economic reforms. “The present government is also doing its business by depending on borrowing and no major economic reforms have been made to boost the economy.”
On Friday, the Oil and Gas Regulatory Authority (Ogra) certified the latest changes through a notification. According to the notification, the price of high speed diesel (HSD) has been reduced by Rs6.18, kerosene oil Rs8.16, light diesel oil (LDO) Rs8.04 for the month of November.
The regulator has notified the new price of petrol at Rs94. 19 per litre, kerosene oil Rs87.52 per litre, HOBC Rs116.45 per litre, HSD Rs101.21 per litre. The new price of LDO, mainly used in industry, will be Rs83.37 per litre.
The move to slash fuel prices was taken in view of a $13 per barrel decrease in the price of crude oil in the Gulf Arab market.
Not so positive after all
The government charges 17 per cent GST on petroleum products and it would be losing a major chunk of revenue due to the cut in oil prices. At the same time, it collects Rs20 billion on account of GST and Rs10 billion on account of petroleum levy (PL) every month. “The government will lose around Rs1.5 billion in revenue due to the decrease in oil prices during November,” said an official at the petroleum ministry.
To a certain extent, the oil industry itself stands to lose, as it will be facing inventory losses due to the cut in oil prices. However, the government on Thursday raised its margins to bail it out.
Still industry officials claim that since CNG stations mostly remain closed in areas of Punjab, oil price cuts would facilitate consumers and also result in higher sales of petroleum products.
The transport and agriculture sectors are also among major users of oil and oil price cuts would facilitate the farmers and consumers. But in Pakistan, the regulation of the transport sector is very poor and people are not hopeful that they would be given a major relief in fares. In remote areas, petroleum dealers are also out of control of the oil regulator and oil marketing companies as they overcharge the consumers.
Truth about lower prices
The boom in shale oil production in United States apparently leads to a lowering of oil prices in the global market — which transforms into relief for the local consumers and pushes the economy. However, experts are uncertain to predict whether this trend will continue in the future or not.
OPEC usually halts oil production during such times to maintain the oil prices but this time around they made no such intervention and the supply to global market continued.
Some experts are of the view that energy supply to China and India has not increased and, therefore, a major drop in oil prices has been witnessed.
According to experts, the tussle between the US and Russia over Ukraine issue appears as a major reason behind the cut in oil prices, while OPEC giants like Saudi Arabia and Kuwait did not reduce their production to push oil prices.
They argue that Russia is also a large exporter of oil, which exports 9 to 10 million barrels oil. The US and Middle East countries have joined hands to hit Russia by lowering oil prices, experts claim.
However, amid this entire tussle between the giants, developing countries like Pakistan will benefit from this decline in oil prices. Pakistan is an oil importing country and pressure on its foreign exchange will also ease due to the price cut.
“The cut in oil prices is significant for the economy of Pakistan which would lead to lowering the cost of doing business,” said economist Dr Saboor Ghayoor. He expects economic activity to get a boost following the cut in oil prices.
Pakistan also relies on fuel when it comes to power generation and a drop in oil prices will lead to a reduction in power prices. Currently, the government has been keeping power production at a low level to avoid the subsidy — reduction in oil prices is likely to encourage the government to enhance power production. However, experts believe that it will depend on lowering of oil prices for a longer time.
“Global oil prices will not drop further as they will stop at $80 per barrel,” said former finance ministry adviser Dr Ashfaque, adding that US has become an oil exporter now and the economy of its shale gas would deteriorate if oil prices come down further. He added that oil prices have jumped down by 25 per cent since June.
Published in The Express Tribune, November 1st, 2014.