"The government has turned the setting of
prices over to the Oil Companies Advisory Committee (OCAC), however,
this gives the appearance of collusion. In many countries this would
be illegal." This is not a claim made by an opposition party or
by anti-government activist but it is an excerpt of a commentary from
a World Bank report carrying No. 26072, published in October 2002.
This speaks volumes of the malpractices being committed in the name of
liberalization and competitive market economy.
For the fourth time in the last three months, the
government has raised POL prices, this time by 3.4-4.3%, to recoup its
Cumulatively, since mid-December 2004, domestic oil
prices have been raised by approximately 17-18%. Effective March 1,
2005, motor gas , HOBC and kerosene oil prices have been raised by
3.7%, 3.4% and 3.5% respectively. LDO and HSD prices depict a
respective 4.3% and 3.9% increment.
Reportedly, the OCAC has stated that prices in the
international market in the last fortnight of February 2005 have
soared ensuing an increase in demand in the US and China, OPEC
controlling production and other geo-political issues around the
world. The news report further stated that the mean price of oil
products in the Arab Gulf have also increased by 4-8% and it is in
this perspective that prices of POL products have been revised.
An increase in oil prices is generally positive for
the OMCs in the form of inventory gains and higher rupee margins, said
The timing of these price increase is important,
especially in the context of PSO's renewed privatization process. The
boost to PSO's profitability ensuing from the oil price increases
would enable the government to attract high profile bidders and fetch
an attractive price for the company's strategic sale. Of the
cumulative hike in petroleum prices since mid-December, we estimate
the post-tax impact on PSO and Shell's earning per share for the
fiscal 2004-05 at Rs4.6 and Rs8.0 respectively.
A complex and opaque price fixing formula
pronounces the ambiguity in the whole exercise.
For instance an import-parity price formula is
allowed to the refineries. A simple question arises in a commoner mind
who and why import-parity formula is applicable when the country has
become self-sufficient in gasoline.
In Pakistan only, HSD imported with 0.5 percent
sulphur is a premium product as per Platts Oilgram. Then why
refineries producing one percent sulphur HSD are allowed premiums as
it is not a premium product. Moreover build-up of import-parity
prices, in principle, out to be public. The formulae and detailed
calculations out to be published and posted on government and industry
In the case of fuel oil, deregulation has occurred
in a market where Pakistan State Oil has considerable market power.
The government ought to closely monitor domestic and international
fuel oil prices to ensure that PSO prices are reasonable. Further
spike in inflation is feared for now. The back of the incessant surge
in oil prices, inflationary numbers are to maintain their firm
The Consumer Price Index (CPI) during the first
seven months of the current fiscal has averaged almost 8.8%. Inflation
rose by 8.51% during January 2005, approximately 114bps higher
compared to 7.37% during the previous month. Overall CPI during FY05
will range between 8.5-9.0%, well above the government's revised 7%
target. Oil inflation generally impacts the economy with a lag and has
a multiplier effect on most economic sub-sectors as it effectively
raises the aggregate cost of industrial production. The inflation has
already gone much beyond the official estimation and it would have
negative impact on industrial and agricultural growth as well. The
decision seems to be short-sighted as it comes when Pakistan's main
export earning sector i.e. textile industry would face tough
competition following abolition of quota system. One fails to
understand how we expect our cotton products to compete in the
international market when the cost of inputs is going up.
The Alliance for the Restoration of Democracy (ARD)
members have already submitted an adjournment motion to the National
Assembly Secretariat to discuss the recent increase in the prices of
petroleum products. The motion states: "The Oil Companies
Advisory Committee (OCAC) and oil marketing companies have increased
the prices of petroleum products, including petrol and diesel. The
increase in petrol prices has become a "petrol bomb" for the
general public. The people of Pakistan are stunned as they are already
under pressure of high prices of other consumable items. This increase
has also rightly provoked other opposition parties, especially
Jamat-e-Islami whereas its chief Qazi Hussain Ahmed is expected to
herald protest rallies to raise voice with the masses.