IS PETROLEUM PRICE TOO HIGH?
By M. TARIQ WASEEM
Jan-28 - Feb-03, 2002
Whether petrol prices are too high or not is a matter of common debate. In the recent past the prices of petrol are frequently changing, sometimes increasing and at other times decreasing though by a margin of Re. 1/2 to 1 Re. on either side, but generally the prices have arranged around Rs. 30-33/ liter.
Importance of petrol in daily life is quite apparent. Petrol is a strategic fuel for economic life line. Its price affects cost of production in a variety of ways as with the increase in its prices, cost of transportation of import, export and goods for local consumption goes up. Besides air, rail, road and sea transportation rates rise with the escalation in the price of petroleum.
This article examines the question whether the price of super petrol which has been fixed by the govemment till recently and now by the petroleum cos. is too high in Pakistan in comparison with other countries keeping in view their respective per capita incomes.
For this study, we have relied on figures available for the World Bank, "2001 World Development Indicators" and World Development Report 2000-2001 for GNP per capita measured at purchasing power parity rate basis in $ for 1999 and super petrol price in $/liter for Pakistan and other selected countries.
RATIO BETWEEN PETROL PRICES AND PER CAPITA INCOME
(of 10 Lowest Oil Price Countries)
Petrol prices ($/liter)
Pakistan rupees @ Rs. 60/$
Per capita income at PPP (PCI)
PCI equivalent to liters petrol
How many times is the price of petrol more expensive in Pakistan
Source: "2001 World Development Indicators", World Bank.
In order to work out how much oil is more or less expensive in Pakistan than other countries, we divide per capita income by petrol price (in $) to arrive at the quantity of petrol liters which can be purchased.
The above-mentioned countries are the countries with the least expensive petrol in the world ranging between $ 0.02 to 0.25 per liter which means the prices of petrol in Pakistan are more expensive by 27 times to 2 times without regard to their purchasing capacity, i.e. their per capita income. If their per capita incomes are taken into account, the prices of petrol in Pakistan would became still more expensive to a ratio between 47 times for Turkmenistan and 31 times for Iran.
Many of the above mentioned 10 countries are also petroleum producing countries and hence could afford to keep prices down. The petrol price in Turkmenistan is only 3.77% of the price of in Pakistan with due weight given to their respective per capita incomes or Pakistan petrol price is 47 times more expensive than in Turkmenistan.
In the following table the price of petrol in Pakistan is compared with the top ten most expensive fuel countries along with their per capita incomes.
RATIO BETWEEN PETROL PRICE AND PER CAPIA INCOME
(with 10 Most Expensive Petrol Countries)
Average Fuel Price $/Liter
In Pakistan Rupee@ Rs. 60/$
Per capita income at PPP
PCI equivalent to petrol (litres)
Times Petrol more expensive in Pakistan
The price of petrol between Pakistan and other most expensive fuel countries is higher 100-175% but if the per capita income is taken into account, the difference goes up. It is estimated that the petrol price in Pakistan is worked out to be as expensive as 6.64 times in Japan, 6.75 times in Norway, and about 5.38 times in UK if per capita incomes are considered.
Source: 1. 2001 World Development Indicators, World Bank.
2. World Development Report, 2000-2001, World Bank.
The following table compares petrol price in Pakistan vis-a-vis other income group countries.
PETROL PRICES AND GNP PER CAPITA IN PAKISTAN AND OTHER INCOME GROUP COUNTRIES
Fuel price $/liter
In Pakistan Rs./liter@ Rs. 60/$
Per Capita Income
PCI equivalent to petrol (litres)
Times petrol price higher in Pakistan
Source: "2001 World Development Indicators", World Bank
The above table reveals that although the price of petrol in terms of dollars is quite comparable with most of the rest of the world ranging around $0.50/litre, yet the cost is too high if the per capita income of Pakistan is taken into account.
While a Pakistani can buy 3315 liters of petrol based on his per capita income/ year, a high income and middle country man can buy 25306 and 10166 liters of petrol with his income which are 7.63 and 3.06 times higher than Pakistan. If comparison is made between the world average and Pakistan, the ratio roughly is 3.62 times higher. However, for low income countries the average price is $0.49 /liter, a little less than Pakistan and GNP per capita of $410, and thus Pakistan is slightly better off.
In the following table, the per capita income (at PPP basis) and petrol price in Pakistan vis-a-vis other major selected countries have been compared:
PER CAPITA INCOME AND PETROL PRICE
(times higher or lower than Pakistan)
Per capita income $ (PPP)
Times higher than Pakistan
Super fuel price $/liter
Times higher than Pakistan
The composite table shows that the countries with the highest fuel prices have around 100-125 % higher prices than Pakistan while their per capita incomes are much higher by average 3 to 12 times. However, in comparison with low income countries, fuel prices are lower by about 8% vis-a-vis Pakistan with per capita income higher by only 2%, which shows that petrol prices are high. If you look at China, India and Bangladesh, the fuel prices in Pakistan are cheaper in China and Bangladesh but less expensive than in India.
For which data are available, there are 158 countries having per capita income, on purchasing power parity basis, higher than Pakistan out of 206 countries. In case of fuel prices, Pakistan is 59th amongst the highest fuel price countries, as given in the table ahead.
PAKISTAN'S RANKING: PER CAPITA INCOME AND PETROL PRICE
Per Capita Income ($)
Fuel price $/liter
0.53 (7 countries) 59th
No of countries
higher than Pakistan
No of countries
lower than Pakistan
Petrol price in Pakistan is $0.53 per liter with the per capita income of $ 1757 at PPP. On the basis of world average per capita income of $6490 and the petrol price of $0.54 /liter as against Pakistan's per capita income of $1757, the price of petrol should have been $0.15 or about Rs. 9 liter as against about Rs. 31/litre about 3.4 times more. There are 7 countries with the same petrol price in dollar, i.e. $0.53.
On the basis of both petrol price per capita income and the quantum of petrol that could be purchased with the per capita income, the following 10 countries have been listed with the lowest and highest petrol prices.
REVISED LIST OF LOWEST AND HIGHEST OIL PRICE COUNTRIES
A 10 Lowest Countries
B 10 Highest Countries
5. New Zealand
10. Bulkina Fasu
Out of 124 countries for which data of both petrol price and per capita income are available, Pakistan is ranked at 33rd with highest price of oil and 91 countries with lower petrol price through this methodology which takes into account both the factors simultaneously. Most of these countries with higher petrol prices belong to Africa or have smal1 economies.
This article has examined an important question that whether the prices of petrol in Pakistan are high or not. It has to be related to a number of factors which are:
(l) Whether the economy of the country is dependent upon imported oil and to what extent and what are prices of imported oil? 2) What are the duties/structure on imported oil and to what extent the country's revenues are dependent on oil related import revenues? 3) What are the per capita income level and extent of dependence on imports in different countries?
Regarding the first two points — the international oil prices and extent of dependence of the country's revenue receipts upon petroleum related taxes — it is stated that the level of domestic production does not necessarily determine the price or the level of duties on petroleum products, although evidence does suggest that the countries with plenty of petrol and exporting to other countries have lower prices.
However, the question in this article examined is that whether the price of super petrol is high in Pakistan in relation to the Pakistan's per capita income keeping in view both the factors in other countries.
The following conclusions have been drawn from our analysis:
1. Pakistan is ranked 158th from the highest to the lowest income countries on per capita basis, but in terms of petrol prices it is ranked at 59th amongst the countries with most expensive petrol out of 153 countries for which data are available.
2. In comparison with the countries with the least expensive oil, Venezuela is the country with the cheapest oil in the world in terms of $/liter and per capita income Pakistan's oil is 47 times more expensive than Turkmenistan, 30 times, Iran, 4 times Vietnam and 4 times Indonesia.
3. Petrol is Rs. 1.20 /liter in Turkmenistan, Rs. 1.80 in Iraq, Rs. 3.0 in Iran and Rs. 15.00 for UAE as compared with Rs. 31.80/litre in 2000 / @ Rs. 60 /dollar rate in Pakistan.
4. Amongst the most expensive countries, the petrol is Rs. 87.60 /liter in Hong Kong, Rs. 71.40 in Norway, 70.20 in UK, Rs. 63.0 in Japan and Rs. 61.80 in Netherlands.
5. Amongst the most expensive fuel countries, the petrol is 4.33 times, 6.72, 2.09, 5.38 and 19.27 times more expensive in Hong Kong, Norway, Uruguay, UK and England as compared to Pakistan. This means that although the price in these countries is amongst the highest in the world, yet Pakistan is still more expensive because of wide difference in their per capita income. The high per capita income makes hardly any difference in purchasing capacity of the consumer in their countries.
6. Pakistan's comparison has been made keeping in view both the items, petrol prices and per capita income, with the world low-income, middle income and high income countries. The composite average is higher by 3.62 times in Pakistan as compared with the world's medium average. With high income countries the petrol prices is 7.63 times higher in Pakistan.
7. Pakistan is ranked 33rd with the most expensive oil amongst 124 countries with 91 countries behind Pakistan with less petrol prices with both the factors petrol price and per capita income taking into account.
8. If the petrol price has to be determined keeping in view the per capita income of the people and the world average price, it should have been around $0.15 /liter as against $0.53 /liter in Pakistan. The present price is very high vis-a-vis purchasing capacity of the people of the country and economic feasibility of industries. The high price of petrol has adversely affected cost of production and frequently contributed to increase in road, rail and air freight charges which have made domestic production incompetitive in international markets.
However, a number of factors have to be considered for determination of the petrol prices in any country such as per capita income (or purchasing capacity of the people), imported oil's share in the total country's demand, the duty on imported oil, contribution of import duty on oil in the national revenues, cost of refinery expenses, excise duty on locally refined petrol, distribution margin, dealer's commission., inland freight margin and development surcharge, etc.
Petrol is one of the most important inputs in a nation's economy and its price has wide social and economic repercussions. The study shows that the price of petrol in Pakistan is significantly high both with or without relating to per capita income and needs to be scaled down in order to ensure competitiveness of the country's exports and reduce the burden on the purchasing capacity of the people. However, this cannot be an easy task when the country depends heavily on imported oil to meet its requirements and the import revenues and development surcharge constitute a major segment of the Government revenues. Nevertheless, a viable and equitable solution to rationalize petrol price is required keeping in view the revenue generation aspect and prevalent international crude oil prices.
*The writer is Economic Research and Feasibility Study Consultant, and currently Director, Planning and Development, Government College, Lahore. E-mail: email@example.com. Website: www.consultantint.cjb.net