DEREGULATION OF FURNACE OIL
KESC and WAPDA should reduce the electricity charges
BY FARAZ SIDDIQUI
Aug 07 - 13, 2000
Decision by the government to deregulate fuel oil early last month has allowed the market forces to drive the prices by and large. Decision to deregulate the fuel oil business and approval for the free import of furnace oil in budget 2000-2001 was a major breakthrough and first step towards price rationalization. Recently Pakistan State Oil (PSO) has reduced the oil prices by 14 per cent in order to pass on the benefit due to fall in oil prices in Arabian Gulf.
On July 26 Pakistan State Oil has announced to decrease the oil prices by Rs 1,590. The ex-installation price at Port Qasim was charged by PSO Rs 11,368 per tonne, now the price has been slashed down to Rs 9,778 per tonne. In response to the market leader PSO, two other companies also reduced the furnace oil price, Shell Pakistan has reduced the price by 6.4 per cent from Rs 11,649.50 per tonne to Rs10,907.75 per tonne and then further on August 3 by upto 7.2 per cent to Rs 10,120 per tonne. Shell took the decision as their main supplier National Refinery has revised its prices downward. Caltex Pakistan has also reduced the ex-Karachi price by 4 per cent from Rs 12,342 per tonne to Rs 11,862.25.
Before deregulation, the Federal government used to adjust furnace oil price on quarterly basis under pass through formula. As the prices were reduced by Gulf countries from $ 175 per tonne to around $ 143 per tonne, PSO took immediate decision to reduce the prices of furnace oil in order to pass the benefit to the consumers. This over all decrease in furnace oil will have far reaching effect on country and industrial sector, if sustained.
At present 15000 MW of electricity out of which over 10316 MW are generated through thermal plants mostly using furnace oil. Karachi Electricity Supply Corporation (KESC), Water and Power Development Authority (WAPDA), Hubco and other IPPs are the biggest consumer of furnace oil. Before this WAPDA was paying Rs 12,227 per tonne, now they would pay Rs 10,637 per tonne. KESC will pay Rs 9,587 per tonne as against Rs 11,177, Hubco Rs 10,110 as against Rs 11,700. Price paid by furnace oil users before deregulation was Rs 11,132 per tonne. This will help to cut down their costs of generation and will bring down their purchase bill which will be resulted in an overall improvement in the cashflow. Now these organizations have no need to demand an immediate increase in electricity charges.
Besides power sectors this decision will help the whole industrial sector. Industrial users like cement, sugar and foundries will also stand to gain. Cost of production will reduce which will increase the profit margin. All sectors in general and cement industry in particular can get their cost reduced and improve their cashflow. But it must be borne in mind that ultimate result should be a relief for general public by transfer this benefit in the form of low prices of concern products.
Pakistan imports furnace oil over 8.3 million out of which 6.5 million tonnes mainly from Gulf region, while 1.8 million tonne from local refineries. The lower price of furnace oil will reduce the industrial cost which can make our export competitive because high cost is a main detriment to have a competitive edge over countries like India. Furnace oil is also a major item of our import and bulk of foreign exchange is being consumed in this regard. Now the slash down in oil prices will cut down the payment for fuel oil export which will ultimately reduce the trade deficit level to some extent and improve balance of payment.
The decision by PSO is significant which enjoys 85 per cent market share and is in the position to dictate the prices of furnace oil in the country. It has an only furnace oil storage at Port Qasim. So the decision of reducing the prices is a rational behaviour rather than money making approach.
Besides this PSO has recently awarded contract for import of 240,000 tonnes of fuel oil to Patronas Malaysia and Bakri Bunker of Saudi Arabia, would supply two cargoes each during next month as the Finance Minister already announced to deregulate import of furnace oil. With the deregulation of fuel oil import and reduction in price by PSO has raised many hopes in the public for the decrease in electricity rates.
So far KESC and WAPDA suffers from high cost of power generation due to high prices of furnace oil. Now reduction in furnace oil price has fulfilled their long standing demand, so in order to pass on its maximum benefit to the consumer they should also announce reduction in electricity charges.