The decline in oil prices

Benefit is not passed on to common man

Dec 10 - 16, 2001

More or less 37 per cent decline in international oil prices from $28 to $18 per barrel from June to November this year, unprecedented decline in oil consumption and around 25 per cent cut in price at home have resulted in some interesting impact both on the public as well as the private sector.

Due to decline in oil consumption, the government was able to save at least one billion dollars on account of oil imports which may be taken as a positive sign as far as the foreign exchange expenditures are concerned but at the same time it gives a signal for negative growth in the manufacturing sector.

The consumers were happy to see the headlines regarding downward revision of the POL products appearing in the newspapers every fortnight since last 2-3 months. The 4 cuts in oil prices had raised the hopes that the multiple effects on general prices especially oil-based products would come down accordingly, however due to absence of any effective price control mechanism their hopes were diminished.

A.Q. Khalil, President of Karachi Chamber of Commerce and Industry (KCCI) while talking to PAGE said that it is unfortunate that whenever there is any increase in oil prices, the prices of oil based products and services are immediately passed on to the consumers. However, in case of decline in prices, nobody bothers to take a prompt action in the larger interest of the masses. He bitterly said that the airlines and railways fare, electricity charges, cement prices and other oil-based products were increased on the ground of increase in oil prices. But now when the prices have gone down considerably the prices of consumer items are static to the post oil price decline period.

The good governance and poverty alleviation are among the top priorities of the present government, which is equally applies on price control of the oil based products, charges of oil based utilities and services in accordance to the level of oil prices in the country.

It is amazing to note that whenever the oil prices go up, the transporters are allowed an increase immediately but when the prices have comedown an insignificant cut of Paisa 50 has been decided by the provincial transport authorities. It is the sad story that nominal relief given by the transport authority in fares is not being given to the commuters by the transporters. The concept of good governance and programme of poverty alleviation needs to be practically applied and enforced in the daily life of the poor, otherwise the concept will be nothing but a decorative statement for the newspapers.

Oil marketing companies

It may be recalled that 8 to 10 per cent devaluation had been the norm in the value of rupee against dollar and the government was more than willing to pass on the increase to the consumers for its own gains. Oil marketing companies had been experiencing considerable inventory gains during the last few years. Every time there was a price increase in POL products, the inventory held by oil marketing companies increase in value overnight. However this time with each cut in POL prices, the companies suffered an inventory loss.

According to an analytical report, profits of oil marketing companies will take a hit in financial year 2002 after decline in oil prices by as much as 25.7 per cent since June due to fall in consumption and appreciation in Pak rupee value versus the dollar since the Sept.11.

The forces exerting downward pressure on oil prices were quite significant this time. For one, there was a substantial fall in the price of oil, which declined from $28 a barrel in June to around $18 a barrel in November a fall of 36 per cent.

In addition, for the first time in recent history, there was an appreciation in the value of Pak rupee against the dollar. Traditionally, the perpetual devaluation gave an excuse, or perhaps logic, in increasing oil prices even in times of depressed oil prices. However with the appreciation in rupee value, the pressure for price cuts intensified.

As a result of decline in petroleum prices, the profits of oil marketing companies are essentially a function of two things. Commission income and inventory gains, both will have impact negatively by recent developments.

As of now, oil marketing earns fixed commission on the retail price of regulated POL products. Of all the POL products, only lubricants business is completely deregulated. Furnace oil is deregulated to the extent of price liberalization and there is a fixed rupee-based commission per ton.

Excusing furnace oil any decline in POL prices impacts directly the commissions earned by oil marketing companies. Even if international prices do not fall any more, the commission income of oil marketing companies can decline for two reasons: one, the full impact of the decline in oil price is yet to materialize and might be seen in one or two more downward revisions, second, the overall POL consumption so far this year has been lower than last year. Even before the events of Sept 11, the size of the market had been stagnant at around 18.2 million tons per annum, with expectations of slight decline in the financial year 2002. In all probability, sales volume for oil marketing companies will register a decline during this period.