Falling global oil prices are expected to make their presence felt across petrol pumps in Pakistan in an even bigger way next month, with petrol prices expected to decline by 13.7% in February, down to levels not seen in the last seven years.
The Oil and Gas Regulatory Authority (Ogra), the agency charged with regulating prices, has recommended a significant drop in prices across the board for petroleum products to the government.
According to Ogra’s recommendations, petrol prices in February will drop by Rs10.75 per litre, or 13.7% to Rs67.53 per litre. High speed diesel (HSD) prices are expected to drop by Rs8.80 (10.2%) to Rs77.43 per litre. For high octane blended component (HOBC) prices are likely to decline by Rs14.85 (16.1%) to Rs77.15 per litre, kerosene by Rs12.92 (18%) to Rs59.00 per litre and light diesel oil by Rs11.84 (17.5%) to Rs55.66 per litre.
The sharp declines in prices will lead to the relatively unusual situation of diesel being more expensive that HOBC, a premium fuel typically used for luxury cars.
If Ogra’s February recommendations go through, petrol prices in Pakistan will have declined by 41% from their October 2013 peak, when petrol sold for Rs113.89 per litre on average across the country. Brent crude prices, the global oil benchmark traded in London, has declined by 58% during that same period and is currently trading at $49 per barrel, a price not seen since March 2009. Oil prices in Pakistan typically lag global markets due to the nature of the supply chain.
Oil prices in Pakistan are deregulated in theory. In practice, however, Ogra collects data from the oil companies and drafts a recommendation for the government, which is then typically sent to the petroleum ministry and finance ministry for approval before receiving the final sign-off from the prime minister himself.
The finance ministry gets involved in the process because close to 25% of all government revenues come from the taxation of energy, primarily oil and gas. The decline in prices has had a detrimental effect on the government’s ability to collect revenues, leading the finance ministry to take the unusual step of hiking the sales tax on petrol to an unprecedented level of 22% of the final sale price.
If the oil price drop goes through as planned – which usually happens – the price of petrol will be cheaper than that of compressed natural gas (CNG) for the first time in recent history. The cost of petrol will be Rs9 per litre lower than the per kilogram cost of CNG in Balochistan and Khyber-Pakhtunkhwa and Rs4.50 per litre compared to a kilogram of CNG in Punjab and Sindh. Two kilograms of CNG is roughly equivalent to three litres of petrol in terms of its energy content, according to the United States Department of Energy, though the efficiency of car engines in burning natural gas can be vastly different depending on its make.
January’s decline in petrol prices had caused a sudden increase in the demand for petrol which led to an acute shortage of petrol in Punjab, the province that is most reliant on CNG as an alternative fuel source.
In deciding the prices for February, the government faces a trade-off. They can choose to lower prices, which would be popular, and run the risk of another shortage, or they could keep prices at higher levels, which would not result in supply shortages, but would also not make consumers happy to compare their fuel prices to those paid by people in other countries. The government appears to be on the verge of choosing the former option.
The declining prices of petrol and diesel, in turn, are likely to keep overall inflation in check, currently hovering around the 6.1% mark for the current fiscal year.
Published in The Express Tribune, January 30th, 2015.
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