Fixing responsibility for the petrol crisis

Despite availability of sufficient resources, we don’t manage our petrol, gas or electricity by price mechanism

When it comes to the saga of the petrol shortage, one notices constant blame-game, seeking of ‘accountability’, excuses and little else. What is conspicuously absent in any discussion in any sphere of the fuel crisis is an economic analysis and highlighting of the basic fact that we have a shortage crisis. Despite the availability of a sufficient amount of resources, we don’t manage our petrol, gas or electricity by a stringent price mechanism and seek, instead, to exert central control over resources that should be readily available to all.

Global experience of the past 100 or so years has taught us two things. One is that no one can fix prices of things centrally. Needs and supply and other local factors are too fluid and different for each central planner to determine the right price of any commodity. Indeed, many socialist regimes tried and failed for decades until their whole enterprise fell under the weight of their planning. In the US, four petrol pumps facing each other all have slightly different prices. Secondly, governments are too inefficient to manage services. We see that in Pakistan, public sector health services cost two to 10 times more than similar quality of private services.

Contrast these lessons with our lot in Pakistan. We have a ministry of petroleum, an Oil and Gas Regulatory Authority (Ogra), and a state oil company, all giving the government an essential monopoly over the fuel consumed in the country. As expected, the government uses this monopoly to manipulate consumer sentiment rather than improving lives for people by ensuring steady supply of cheap and consistent electricity or petrol. That it acts without any economic rationale is exemplified by the fact that on the one hand, whether you buy petrol in Karachi (where the port and refineries are located) or in Chitral (which gets petrol that is trucked a thousand miles), the cost is the same; and on the other, natural gas is Rs7 per kilogrammes for domestic users, Rs70 as CNG in cars and Rs160 for industrial users. The power sector which is nearly completely publicly owned has typical inefficiencies where despite a 300 per cent reduction in price of petrol, our electricity bills continue to climb and shortages remain rife. Since oil is used to produce electricity, this rise is inexplicable.

When it comes to the 10-plus hours a day of load-shedding, this recent crisis further exposed that this terrible and extractive system is not working. We really must learn from lessons that are well absorbed in nearly every other country. For example: 1) We must switch to a pricing mechanism to manage supply and demand for fuel (petrol, gas or electricity) and move away from central pricing; 2) We should dissolve the petroleum ministry and Ogra as redundant and harmful; 3) we should privatise the state oil company. People are already paying for the energy they use directly (actual price plus taxes) and indirectly (time and opportunities lost while waiting in lines or during load-shedding). Let them decide how their money and time will be spent, by allowing them the choice to purchase energy as they see fit and not as determined by an inept system of colluding suppliers and regulators.

Published in The Express Tribune, January 22^nd, 2015.

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