It is often said that the petroleum, oil and
lubricant (POL) price movement in Pakistan does not show a trend which
matches movement of international prices. Lately it has been observed
that when crude oil prices were sky rocketing, the GoP froze domestic
prices. Then a declining trend was evident globally, but POL prices
were on the rise in the country. There may be various explanations for
the disparity but there should be effort to find out the factors
having the potential to affect domestic prices of POL.
It is a fact that POL prices are directly dependent
on the movement of crude oil prices. It is also a fact that there is a
time lag between the movement of crude oil and POL prices. However,
lately oil marketing companies have emerged to be the biggest
beneficiaries due to gain on inventories. The company enjoying the
highest inventories has been the biggest beneficiary.
There are regular news items about rising prices of
crude oil. However, very few people know what type of crude oil is
relevant for Pakistan. Globally various benchmarks are used and the
most common are: US light crude, Brent North Sea crude, OPEC basket
and Middle East crude. Only the GoP and/or Oil Companies Advisory
Committee (OCAC) know the exact basis of calculation of POL prices. It
is understood that Pakistan imports bulk of its crude oil as well as
POL products from the Middle East. Therefore, Middle East crude prices
are relevant for Pakistan.
As regards of prices there are also various
benchmarks that include futures contract, spot and long-term
contracts. Therefore, any reference to futures contract and/or spot
prices is totally irrelevant for Pakistan. The long-term contract
prices are least volatile and much below all other prices. It is
totally correct to assume that Pakistan has signed long-term supply
contracts and the prices are much below the spot prices.
Some of the critics are of the view that in
Pakistan bulk of the retail prices of POL products comprise of
government levies, commonly known as petroleum development surcharge.
It is believed that historically the GoP has been using this levy as
the most dependent source of revenue. At times, the annual collection
under this head used to range from 70 to 80 billion rupees. It is a
fact that the present government has not been using this levy to
compensate for the shortfall as recklessly as it was used in the past.
It is also a fact that GoP froze the POL prices for some time but
could not hold on the prices indefinitely.
Despite acknowledging this fact, one cannot resist
from pointing out the perception that the various taxes applicable on
POL products still constitute a significant percentage of the retail
price. The critics say that in an attempt to camouflage the taxes, the
government has merged some of the taxes into the cost of product. They
also say that the presentation made before the Senate Committee was
only an eye wash.
Some of the critics are of the opinion that the
margin paid to the oil marketing companies is too high. To
substantiate their point of view they refer to the level of dividend
payout by the two oil marketing companies listed at the local stock
exchanges. Majority of the shares of one company is owned by the
government. And higher dividend payout is aimed at getting the highest
receipts prior to its privatization. However, the users are paying the
Lately, the government has also enhanced the
commission of outlets (petrol pumps). They have been demanding the
rise for some time. While one may be ready to bear the cost of higher
commission, the most pinching point is that the commission is
calculated after adding the taxes. This is neither fair with the
government nor with the users of POL products.
The mandate for revising the POL prices has been
given to OCAC. The overwhelming perception is that the GoP has opted
for this for face saving. It can be said very conveniently that the
prices are determined by the POL marketing companies and not by the
government. However, some of the critics have no hesitation in saying
that OCAC only follows the guideline of the government. Therefore,
this mandate should be given to the Oil & Gas Regulatory Authority
At present the POL prices are fixed on fortnightly
basis. Some of the critics are not happy with this arrangement and are
demanding revision of prices on daily basis. This is really too much.
Historically, all the businesses are prompt in revising prices upward
but are hardly willing to reduce the prices. In fact oil marketing
companies should not be allowed to make inventory gains.
Last but not the least, the government must bid
farewell to its policy of following uniform prices of POL products
throughout the country. The areas located close to port virtually
subsidize the cost of POL users located in the northern areas. In
fact, the government should bear this cost and adjust it against the
royalty being paid to other provinces against oil, gas and hydro