INCREASE IN POL PRICES

Hike is important, especially in the context of PSO's privatization: analysts

By ASHRAF KHAN
Mar 07 - 13, 2005

"The government has turned the setting of prices over to the Oil Companies Advisory Committee (OCAC), however, this gives the appearance of collusion. In many countries this would be illegal." This is not a claim made by an opposition party or by anti-government activist but it is an excerpt of a commentary from a World Bank report carrying No. 26072, published in October 2002. This speaks volumes of the malpractices being committed in the name of liberalization and competitive market economy.

For the fourth time in the last three months, the government has raised POL prices, this time by 3.4-4.3%, to recoup its budgetary losses.

Cumulatively, since mid-December 2004, domestic oil prices have been raised by approximately 17-18%. Effective March 1, 2005, motor gas , HOBC and kerosene oil prices have been raised by 3.7%, 3.4% and 3.5% respectively. LDO and HSD prices depict a respective 4.3% and 3.9% increment.

Reportedly, the OCAC has stated that prices in the international market in the last fortnight of February 2005 have soared ensuing an increase in demand in the US and China, OPEC controlling production and other geo-political issues around the world. The news report further stated that the mean price of oil products in the Arab Gulf have also increased by 4-8% and it is in this perspective that prices of POL products have been revised.

An increase in oil prices is generally positive for the OMCs in the form of inventory gains and higher rupee margins, said some analysts.

The timing of these price increase is important, especially in the context of PSO's renewed privatization process. The boost to PSO's profitability ensuing from the oil price increases would enable the government to attract high profile bidders and fetch an attractive price for the company's strategic sale. Of the cumulative hike in petroleum prices since mid-December, we estimate the post-tax impact on PSO and Shell's earning per share for the fiscal 2004-05 at Rs4.6 and Rs8.0 respectively.

A complex and opaque price fixing formula pronounces the ambiguity in the whole exercise.

For instance an import-parity price formula is allowed to the refineries. A simple question arises in a commoner mind who and why import-parity formula is applicable when the country has become self-sufficient in gasoline.

In Pakistan only, HSD imported with 0.5 percent sulphur is a premium product as per Platts Oilgram. Then why refineries producing one percent sulphur HSD are allowed premiums as it is not a premium product. Moreover build-up of import-parity prices, in principle, out to be public. The formulae and detailed calculations out to be published and posted on government and industry websites.

In the case of fuel oil, deregulation has occurred in a market where Pakistan State Oil has considerable market power. The government ought to closely monitor domestic and international fuel oil prices to ensure that PSO prices are reasonable. Further spike in inflation is feared for now. The back of the incessant surge in oil prices, inflationary numbers are to maintain their firm posture.

The Consumer Price Index (CPI) during the first seven months of the current fiscal has averaged almost 8.8%. Inflation rose by 8.51% during January 2005, approximately 114bps higher compared to 7.37% during the previous month. Overall CPI during FY05 will range between 8.5-9.0%, well above the government's revised 7% target. Oil inflation generally impacts the economy with a lag and has a multiplier effect on most economic sub-sectors as it effectively raises the aggregate cost of industrial production. The inflation has already gone much beyond the official estimation and it would have negative impact on industrial and agricultural growth as well. The decision seems to be short-sighted as it comes when Pakistan's main export earning sector i.e. textile industry would face tough competition following abolition of quota system. One fails to understand how we expect our cotton products to compete in the international market when the cost of inputs is going up.

The Alliance for the Restoration of Democracy (ARD) members have already submitted an adjournment motion to the National Assembly Secretariat to discuss the recent increase in the prices of petroleum products. The motion states: "The Oil Companies Advisory Committee (OCAC) and oil marketing companies have increased the prices of petroleum products, including petrol and diesel. The increase in petrol prices has become a "petrol bomb" for the general public. The people of Pakistan are stunned as they are already under pressure of high prices of other consumable items. This increase has also rightly provoked other opposition parties, especially Jamat-e-Islami whereas its chief Qazi Hussain Ahmed is expected to herald protest rallies to raise voice with the masses.