OIL HIKE DOMESTIC MAGIC WANDS

By ASHRAF KHAN
Apr 25 - May 08, 2005

The international factors is wreaking havoc on the lives of commoners at home, much striking but so far inconspicuous factor of price distortion could be rightly attributed to the domestic magic wands rather than the international phenomenon.

Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. The crude oil price cycle may extend over several years, responding to changes in demand as well as OPEC and non-OPEC supply.

Recent onslaught of domestic petroleum price has been the gravest concern to all as ever-since international benchmark prices started pickup up to seemingly infinite ceiling. Damocles' sword is also hanging as global oil reserves are in little danger of drying up for many decades.

A perusal of government's own statistics made available in the Energy Book, 2004 of Ministry of Petroleum and Natural Resources suggest a rise of Rs82 billion (1.4 billion dollars). This rise has come only due to allowance of blatant and treacherous rise in the commissions of oil marketing companies and dealers, inland freight and distorting import duties, and sales tax.

In 1999, the OMCs margin stood mere Re0.52 which were suddenly raised by 115.4 percent to 148.1 percent in 2004 to Rs1.29 on per liter of gasoline. Likewise, commission on diesel was also raised 669.61 percent in the same period to Rs1.57 from Re.0.20 on kerosene this increase stands at 371.43 percent to Re.0.66 as compared to Re.0.14. Since July 1, 2002, a new duty protection element was added to the import parity price of four products including High speed diesel, light diesel oil and JP-4 to protect the local refineries in lieu of the guaranteed minimum rate of return.

This protection to the refineries at the cost of poor of the country entails 10 percent of the import value of HSD, six percent of kerosene, six percent each of LDO and JP-4.

Oil Companies Advisory Committee (OCAC) adds the tariff protection to the import parity price for these four products in order to derive the ex-refinery price. The cost borne by the consumers of this scheme is roughly estimated at some Rs2.7 billion or 47 million dollars per annum. About the two-third of the subsidy comes from HSD, which is the second largest consumable product after furnace oil. The total subsidy greatly exceeds by Re1 to Rs15 billion.

The present system of refinery protection has reduced transparency, as refineries are not operating on international price parity for at least four major products.

Economic watchdogs question rationale behind the continued subsidies to the refineries, which could have averted. It is said that the phasing out of the protection for the refineries is most likely to impact on the two refineries in Karachi i.e. Pakistan Refinery Limited and National Refinery, while the other two have the transportation advantage.

Import regulatory duty on kerosene, JP-4 and LDO does not go to the Government of Pakistan as these are not imported at all. So consumer pay these duties and these are pocketed by refineries and OMCs get 3.5 percent more.

One should not howler that the two refineries in Karachi are old and largely amortized as no significant investment were made in these refineries in recent years. Moreover one, NRL, has a profitable lubricants operation while the other could be converted into a storage facility to manage termination for the ongoing protection.

The government agreeing the formula for the OMCs commission also offers not transparency as a World Bank report suggests. "It is difficult to compare this (Pakistani price mechanism) with average OMC margins in other countries," a report of the bank said.

The inland freight margin is set to recover the total primary freight cost for pipeline, rail and road transportation of petroleum products.

The margins, set administratively under the 'freight pool" account for the cost of freight from four main installations including Keamari, Mahmood Kot, Machike and Attock Refinery Limited.

Earlier, the government was administrating the freight pool plan, which it handed down to OMCs, and now each OMC maintains separate accounts for the primary freight. The freight, which used to be paltry Re0.49 in 1999, has now jumped to Rs2.15 to show manifold increase.

The imposition of GST, likewise is a legitimate government prerogative. However, the capping system on consumer prices should be maintained until full competition starts and accounting mechanisms for recovering the full GST out to be instituted.

These factors cumulatively impacted adversely on consumers' price as Pakistani consumers were made to pay artificially lifted prices. This jack-up of price has not been due to increase in international prices. On petrol, a consumer is paying extra and unjust Rs8.675 per lire, an additional Rs8.813 on HSD and Rs4.435 on kerosene. An average consumption of gasoline, diesel and kerosene has been 1.45 million liters, 7.8 million and 0.56 million liters respectively. The sum comes to around Rs82 billion.

This, yet does not include the petroleum development surcharges, which was budgeted to be Rs48 billion for the fiscal 2004-05