PETROLEUM PRICES: HOW FAR WILL IT GO?

The frequent increases in the domestic prices of petroleum products have been causing considerable concern

From SHAMIM AHMED RIZVI, 
Islamabad

Mar 10 - 16, 2003

The prices of petroleum products have been increased twice during the month of February 2003. The petrol diesel and kerosene oil prices have touched an all time high level of Rs.35.74, Rs.25.6 and Rs.23.81 per litre and are almost 10 per cent highest then prevailing in January 2003.

These increases are said to have been readjusted on the basis of petroleum products showing a regular rising trend in the world oil market. Consumers have been warned that the prices may further go up in the next fortnightly review by mid March.

Prices of petroleum products are being almost every fortnight on one pretext or the other. The reasons given to justify the lost hike of about 10 per cent were also related to Iraq crises expected shortage of oil increase hostilities break out and war premium imposed by various agencies. Still earlier increase in prices announced by the oil companies Advisory Committee in October 2000 was justified on account of abolition of excise duty on various petroleum products as well as on the basis of international product prices and application of government levies.

The government seems to have closed its eyes to the excesses of the bodies assigned the task of regulating the prices of utilities and consumer items, so long as the lion's share on account of its levies, duties, surcharges, etc., continues to flow to the state exchequer.

The international price of crude oil is estimated to have risen by about 20 per cent during the year. During the same period the rupee has gained against the dollar by about ten per cent. In view of this the increase in the prices during this period should not have been more then 10 per cent. But the increase affected is between 20 to 25 per cent during the last 14 months. The gains resulting from increased strength of rupee have not been passed on to the consumers.

The main reason for changes of prices seems to lie elsewhere. The government has come to rely on oil, gas and electricity as important sources of revenue generation. Hence the frequent changes in prices and tariff of these items. Shortfalls elsewhere are attempted to be made up from these items. In case of oil products, government taxes constitute more than 60 per cent of the selling price.

This was already known but its authenticity was verified when the director-general, Ministry of Petroleum and Natural Resources, submitted the formula of price fixation to the Lahore High Court recently. According to this formula, in the retail price of Rs.34.41 per litre of petrol (the prevalent price before the latest increase) taxes constituted Rs.17.28; the refinery price of a litre was only Rs.13.01.

These taxes comprised the petroleum development levy Rs.11.99 sales tax (Rs.4.41) and customs/excise (Rs.0.88). Other POL products are also subject to these levies in the same proportion. Instead of stabilizing costs of these strategic products which affect prices of almost every product in the market by adjusting taxes, the government opts for an increase in revenue. This is because every increase in prices bring more than half of the addition into its coffers.

This short sighted policy of the government has added to miseries of the poor and fixed income group which form majority of the population in our country. The fixed income group, salaried class and the common man has received no relief. Instead they have been burdened with constant periodical doze of hike in the prices of utilities with its adverse effects on cost of living. Electricity tariff has been raised by over half of dozen times and gas and petroleum products on over dozen accessions since government took over in 1999. According to a survey petrol price averaged around Rs.26 a litre in September 1999. It now cost Rs.35.74 an increase of 36 per cent.

Besides adding to the miseries of the poor and middle class, the constant price hike is also adversely affecting the sectors of agriculture, transport and industrial production. The impact of the rising prices of POL products may also be felt on the overall price structure in view of higher transportation cost of goods. The frequent increases in the domestic prices of petroleum products have been causing considerable concern ever since they were deregulated some three years ago and linked with international prices of these products. At the same time, the surcharge and other levies imposed by the government on these products are not disturbed. As such the government has estimated to receive Rs.45 billion on this score during the current financial year. As the government's financial position has improved this year and it will also be able to contain the budget deficit, it should itself be able to absorb some of the oil price hike instead of passing it on to the consumer every time. It is all the more necessary in view of feared shoot up in the prices of crude oil in case the US threat of attack on Iraq malerialises.