THE GROWING DEBATE ON POL PRICES

The formula for calculating the prices must be amended to provide relief to the consumers

By SHABBIR H. KAZMI
May 16 - 22, 2005

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 penalty.

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 (ORGA).

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 power.