OIL PRICES: A CONSTRAINT TO AUTO INDUSTRY

Petrol is almost priced doubled than its ex-refinery price

By ZEESHAN A KHAN
Nov 14 - 20, 2005

It was true to say that oil prices were the biggest constraint to automobile industry up till mid 90s, as the use of alternative energy sources is becoming common, particularly Compressed Natural Gas (CNG). It is evident that energy prices, including CNG, has unbelievingly increased in last three years, but the car production and demand has increased enormously too. One might say that the increasing demand roots from cheap auto financing. The argument is exactly true. Therefore, car prices are the biggest constraint than oil prices in auto demand. In absence of auto financing, the recent surge in oil prices would have adversely affected the auto industry.

ROLE OF OCAC

Oil Companies Advisory Committee (OCAC) is the premium oil price setting authority in Pakistan. The committee comprises members from oil refineries and oil marketing companies. The members of OCAC are Attock Refinery Ltd, National Refinery Ltd, Pak-Arab Refinery Ltd, Pakistan Refinery Ltd, Attock Petroleum Ltd, Caltex Oil (Pak.) Ltd, Pakistan State Oil Co. Ltd, Shell Pakistan Ltd, Total-Parco Pakistan Ltd, Bosicor Pakistan Limited.

The government has no representation in the committee and just a couple of weeks ago, prime minister expressed his deep reservations on non-representation. However, the expression of reservations is not enough. Government should appoint an observer in the committee as soon as possible and make sure that consumer rights should be considered while setting oil prices.

OCAC reviews the oil prices twice a month, i.e. first and fifteenth of every month. The companies are restricted to keep their margin maximum at 3.50%, while the committee is trying to take margin limit to 4.0%. The idea of revising oil prices every fifteen days is devised due to high volatility in international market. Therefore, these companies urged government to link local oil prices with the international prices. The committee was supposed to increase price if international prices register hikes and vice versa. But it is evident now that the committee is not following the trends. Recent trend of decreasing oil prices is not followed by the OCAC. The following calculation of oil price is enough to understand the violation of consumer rights:

OIL PRICES FORMULA

UNITS EQUIVALENCY:

One barrel = 42 gallons = 159 liters.

ASSUMPTIONS:

$ 1 = Rs 60

International price of one barrel of crude oil in dollars = $58

CRUDE OIL PRICE:

Price of one barrel of crude oil in rupees = $58xRs60 = Rs3480.

International price of one Liter of crude oil = Rs3480/60 = Rs21.9

OPERATING COST PER BARREL:

Freight premium = $2.16xRs60 = Rs 129.6.

Handling, Bank and LC charges and Marine Insurance @0.9 per cent = $0.522

Handling, Bank and LC charges and Marine Insurance @0.9 per cent = Rs31.32

Wharfage charges @3.85 per cent = $2.233

Wharfage charges @3.85 per cent = Rs133.98.

OTHERS:

Oil companiesí margin @3.5 per cent = $2.03

Oil companiesí margin @3.5 per cent = Rs121.8

CALCULATIONS:

Price of one barrel of oil = Rs3480 + Rs129.6 + Rs31.32 + Rs133.98+ Rs121.8 = Rs3896.7

Refining cost @10 per cent = Rs389.67

Price of one barrel of refined petrol = Rs4286.37

Price of one liter of petrol = 4286.37/159 = Rs26.96 per liter.

INCLUDING TAXES:

Add 15 per cent GST = Rs4.044

Add Excise duty = Rs0.88 per liter.

FINAL PRICE:

Price per liter of petrol = Rs26.96 + Rs4.044 + Rs0.88 = Rs31.89 ~ Rs32 per Liter.

MARKET PRICE:

Price of one liter petrol at outlets of Karachi = 56.29

WHY OCAC WHEN OGRA ALREADY EXISTS?

A common man is amazed why the government has allowed OCAC to set oil prices in the presence of Oil and Gas Regulatory Authority and the Ministry of Petroleum. It creates some suspicion. Under these facts, people don't see any reason to suspect that government is not black-mailed by the oil companies. To eliminate the suspicion, government should immediately shift the price setting authority to OGRA or set an observer in OCAC.

At the mean time, if our information is correct for oil pricing formula, government should minimize the taxes and duties and decrease the oil prices. Under current circumstances, petrol is almost priced doubled than its ex-refinery price.

OIL PRICES TREND

Date

1-10-03

1-6-04

1-12-04

1-4-05

5/11/05

HOBC (Automotive 100 Octane)

35.29

40.87

40.87

50.52

56.29

Kerosene

19.52

24.00

24.00

27.98

32.87

HSD

21.00

24.37

24.37

29.06

~

LDO

16.45

21.05

21.05

26.39

30.97