Government eyes deregulation of fuel prices
• Hastens process amid rise in smuggling, complaints from oil industry
• Move may help shift brunt of public criticism to oil marketing companies
ISLAMABAD: Amid increasing fuel prices and the oil industry’s complaints over the rising influx of smuggled oil products, the government has expedited the process of deregulating petroleum product prices to shift the brunt of public criticism to oil marketing companies (OMCs).
In a directive, the petroleum division has asked the Oil and Gas Regulatory Authority (Ogra) “to share a presentation on the analysis and implications of deregulation of petroleum products” within three days.
This should particularly cover the “in-country freight equalisation margins (IFEM) and other related aspects”, it said.
The directive came following instructions from the Prime Minister’s Office for urgent finalisation of a “deregulation framework for the petroleum sector”, a senior government official said.
The government has been under public criticism for rising petroleum product prices, even though it was not at liberty to change fixed tax rates on various products under the donor-dictated pricing mechanism.
The government’s only role at present is limited to announcing fortnightly fuel prices calculated by Ogra to pass on the impact of the international market and exchange rate to consumers.
The oil industry has also been criticising the government for doing little to stop the massive smuggling of low-quality and cheaper products, particularly from Iran.
This smuggling affects the regulated oil industry’s market share and profitability, and causes the government annual revenue loss of over Rs230 billion.
The industry had warned the government of its inability to upgrade its infrastructure to Euro-5 quality fuels when it had to compete with low-quality kerosene and benzene-grade smuggled fuels freely available across the country.
Pricing independence
An official told Dawn that while the final deregulation framework would come out with the approval of the federal cabinet and the Special Investment Facilitation Council (SIFC), the deregulation of petrol and high-speed diesel (HSD) pricing would mean an end of uniform pricing across the country and the oil companies would be free to set their own prices for different cities and towns.
Legally speaking, he explained, petroleum prices were already deregulated and the government notified only kerosene prices for the retail stage.
In case of other products like petrol, HSD and light diesel oil, the government only notified tax rates like petroleum development levy, customs duty and sales tax, etc. and fixed profit margins for dealers and marketing companies, while Ogra and the Ministry of Finance adjust the IFEM, which currently ensures uniform pricing across Pakistan.
Therefore, the Ministry of Finance normally announces ex-depot prices without notification, while petrol stations set their own retail prices.
On the other hand, the oil industry set its own rates for furnace oil and the high-octane blending component (HOBC) based on tax rates notified by the government.
Now, the government is likely to completely deregulate the prices of petrol and diesel, including commissions of OMCs and dealers, on the pattern of HOBC.
In the new framework, Ogra and the Competition Commission of Pakistan would have a greater role, notwithstanding their limited capacity and outreach, to ensure product quality, availability and competitive environment to avoid market collusion and cartelisation.
This would also mean that the IFEM mechanism would also be deregulated. This means the prices would significantly vary from one city to another and from one oil company to another.
Consumers close to ports and refineries would be at an advantage in getting products at cheaper rates, while those further afield would have to pay a higher price. The difference could vary between Rs3 and Rs8 per litre, depending on the actual transportation cost.
Warning from OCAC
The move comes at a time when the Oil Companies Advisory Council (OCAC) — an association of over three dozen oil companies and refineries — warned the government early this week about “a serious threat to the opportunity of huge investment in the country due to the staggering influx of smuggled petroleum products from Iran”.
In a letter to the SIFC, the advisory council said that besides causing billions of rupees revenue loss to the government and forcing the local refineries to operate at unviable lower throughputs, the “menace of unabated smuggling seemingly under the patronage of official authorities is now reached to the extent that it may jeopardise opportunity of the forthcoming huge investment (worth $5bn-6bn) in refineries expansion and upgradation projects under the Oil Refining Policy for Upgradation of Brownfield Refineries, 2023” notified in February 2024.
It pointed out that the feasibilities of these upgrade projects were based on the optimum capacity utilisation of refineries.
“The smuggling of petroleum products, if continued, would seriously question the viability of these projects, forcing the prospective investors to review their decisions” to bring in huge investment and substantially increase production of deficit products and meet environment-friendly Euro-5 specifications.
Published in Dawn, April 19th, 2024