Though fuel prices in Pakistan are largely driven by international oil prices, the relationship between the prices of the various fuels is not very obvious. The administrative intervention often distorts the pass-through of international prices to domestic Petroleum Oil Lubricants (POL) prices, despite the fact that oil prices have been officially deregulated since June 2011. The government administers the tax and levy rates to cover the fiscal deficit or to enforce certain political considerations. For example, the government may increase tax rates instead of passing on the benefits fully or partially to the consumers when global oil price declines. Similarly, when global oil prices increases, it may decide against increasing the domestic fuel prices to avoid popular resentment.
Natural gas prices are revised bi-annually by the government; following the changes in international crude oil and High Sulphur Fuel Oil (HSFO) prices. The impact of changes in the international crude oil prices first appears in domestic wellhead gas prices, and then passed-on to the end consumers. Oil and Gas Regulatory Authority (OGRA) first computes the revenue requirements of the gas utilities after ascertaining the weighted average cost of gas, which is the average of the cost incurred by the gas utilities on purchase and distribution of gas. The revenue requirement also includes transmission and distribution cost (including depreciation), prescribed return for gas utilities, and certain part of distribution losses. Based on revenue requirement, OGRA recommends prescribed price for gas utilities to the government. The government then notifies the consumer’s prices for natural gas for various sectors (domestic, commercial, general industries, power, and CNG) after including different taxes and levies. However, the business owners are allowed to fix retail CNG prices, as this sector has been deregulated from December 2016. Currently, the government collects sales tax — Gas Infrastructure Development Cess (GIDC), and Natural Gas Development Surcharge (NGDS) from CNG consumers. Besides administrating the gas prices, the government often delays announcement, thereby further distorts the pass-through mechanism of the prices; which otherwise requires 7-13 months for transmitting to the consumer prices.
In the absence of clear price signal, the consumer’s ability to choose between the best available alternatives may weaken, which will also have implications for the fuel demand function. Misdirected government price interventions led to the deviation in demand trends. To date, CNG remains cheaper against its nearest substitutes, petrol and diesel. Moreover in the last decade, the government actively promoted use of CNG in the transport sector as a policy, without assessing its long term implications. Consequently, a mushroom growth in CNG demand latter led the government to announce CNG holidays for three to four days per week.
A number of factors such as, increased gas demand by industries to overcome the power supply shortage and rapid increase in household demand as a result of infrastructure expansions undertaken by the gas utilities contributed to the recent increase in demand for gas. The depleting natural gas reserves further complicated the situation. The transport sector relegated to the bottom in the list of sectors prioritized in the gas load management policy. Moreover, the government banned the import of CNG kits used to convert vehicles designed for petrol consumption though the decision was reversed later. With the CNG kits installed in petrol vehicles, CNG becomes perfect substitute to the petrol.