FUEL PRICE DETERMINATION MECHANISM TERMED FAULTY
Reduction in the prices of petrol and diesel by Rs. 4 and Re. 1 per litre, respectively, again smacks of the government's preference for the elite rather than common man against all its claims and rhetoric for the welfare of the masses.
SAHMIM AHMED RIZVI, Bureau Chief, Islamabad
Jan 22 - 28, 2007
Under mounting public pressure and last minute intervention by President General Pervez Musharraf, the adamant Prime Minister Shaukat Aziz, last week, approved the recommendations of Oil and Gas Regulatory Authority (OGRA) and reduced the prices of petrol by Rs 4 and diesel by Re 1 per litre. However, the price of kerosene oil, which is mostly used by the poor people in rural areas where gas is not available as fuel, has not been reduced.
The OGRA had recommended a uniform reduction of Rs. 3 per litre. The Prime Minister, however, reduced it to Re. 1 per litre in case of diesel and Rs. 4 per litre for petrol while completely ignoring Kerosene oil. According to the decision, the petrol price now would be Rs. 53.70 per litre and diesel Rs.37.70 per litre from previous Rs. 57.70 and Rs. 38.73 per litre, respectively. The price of kerosene oil remains unchanged at Rs. 35 per litre. The new prices took effect from January 16.
It is pertinent to note that the regulatory authority OGRA cannot issue a notification without the approval of the federal government. It can only recommend ant it was recommending reductions for the last three to four months since oil prices started falling in the international market. The Prime Minister, however, turned down the recommendations while reviewing prices every fortnightly and categorically announced that the prices of petrol and petroleum products will not be reduced until the government recovered the loss suffered by giving a subsidy on its sale when prices had surged to $ 70 to 80 a barrel in the international market and Pakistan had frozen its sale prices at Rs.57.70 and Rs.38.73 per litre and did not pass on the impact of the massive increase to the consumers.
While talking to newsmen at an Iftar dinner hosted by Governor Sindh in Karachi October last, Shaukat Aziz made a curt announcement that "there will be no downward adjustment of oil prices as long as the amount of subsidy the government had provided during price hike period is not adjusted". A day earlier, the state minister for Information and Broadcasting held a press conference in Islamabad to announce that oil prices were not going to go down in the wake of the drop in international market. He said that despite reduction in global oil prices, the government was still offering subsidy. The prices of petroleum had been continuously rising since May 2004 for which the government had to delink itself from international market price and moved towards the policy of subsidy for relief to the common man. He said that the government has so far borne Rs.83 billion loss on account of subsidy. "So, there is no point in tying the oil prices with international drop," he added. Advisor to Ministry of Finance, Dr. Ashfaq Hasan Khan and Secretary Ministry of Petroleum Ahmad Waqar were also present at the press conference.
The argument of the Prime Minister as well as his advisors and ministers was not understandable as it was devoid of any logic. The claim that the government had been giving any subsidy on the sale of petrol and petroleum products was nothing more than a cruel joke. The present pricing formulation comprises 43 percent of petrol, 24.63 percent petrol development charges, 13 percent sales tax, 1.56 percent excise duty and 4.8 percent inland freight equalizer margin. As such about 40 percent directly goes to the government, 6 percent to oil marketing companies and dealers. OCAC and now Oil and Gas Regulatory Authority (OGRA) takes care of the stake of all the parties while the consumers are left to suffer.
It is a fact that the government froze its taxation rates when oil prices crossed $ 70 in the international market. It seems that government considers it as a subsidy. What a funny interpretation. Under this logic how the Prime Minister and his cronies would categorise the windfall the government received through continuous additional revenues because of gradual rise in oil prices in the international market since US launched attack on Iraq. Does justice not demand that so called loss of revenue for a few months should have been adjusted against the massive unearned revenues in the past by doubly punishing the consumers ñ first the rise in the landed price of petrol and then loading it with additional taxes - calculated at the rate of 40 percent of the cost of oil. Even under the new prices of petrol, the government will have a share of Rs. 23.80 per litre.
The opposition in the Senate has been agitating for some time that a huge scam is taking place in the pricing of oil. It has been wanting, without success, to discuss this matter on the floor of the house. The government not only refused to debate this issue, it even withheld information sought through questions. The question hour in the parliamentary tradition embodies the members, and by extension the people's right to information. But in our case it is just an inconvenience and the government finds no difficulty in brushing these essential traditions aside. The only conclusion is that it has something to hide.
In the matter of oil imports and its pricing a fundamental change has come about since 2001. Previously, it was the government that floated tenders to import oil or conclude long-term deals with oil producing countries. Since July 2001, in the name of deregulation, the facility has been allowed to oil refineries and oil marketing companies. This may not appear much of problem except that the government lost control over the price being charged for crude oil including its transportation to Pakistan. The oil marketing companies except PSO have generally purchased oil from their mother companies abroad and the price they paid was determined in effect by their superiors. It is difficult for a layman to determine how much padding this created but a detailed investigation could potentially reveal interesting details.
A more shocking area is the issue of determination of oil prices. Before the so-called deregulation it was done by a committee of the government but after 2001, this power was given to its union called Oil Companies Advisory Committee (OCAC). This organization had been in existence since 1963 but since July 2001 it has become the sole authority to determine prices of petroleum products. On the face, it seems like asking the fox to guard the chicken.
When this decision was taken it was considered to be an ad hoc measure because the government had yet to put in place a petroleum regulatory authority. Such an organization called the Oil and Gas Regulatory Authority (OGRA) was created in 2002 and for a long time, for some inexplicable reasons, the power to determine oil prices remained with the OCAC. Only recently it was taken away and vested with the OGRA. This anomaly was highlighted by the World Bank in its report in 2003, saying: "As a matter of fact in many countries the group would be illegal".
The opposition in the Senate also cited other alleged shenanigans of OCAS. Since the price of petroleum products had to be determined within certain margins determined by the government, the organization played around with premiums concerning black and white crude, kerosene mixing percentages, marketing margins and retailer margins. Worse of all, the critics say, to built into the price a 700 percent increase in inland freight margins was sanctioned. This refers to transportation of oil within the country, and was increased form Rs.1.99 to Rs.9.70 pre liter during the OCAC stewardship. As a result the profitability of the three major oil-marketing companies has shot up exponentially since the time they have been involved in price fixing. PSO earned RS. 2251 million in 2001-02 which went up to Rs.5689 million in 2004-05, a rise of 152.73 percent, Shell earned 1056 in 2001 which went up to 2451 in 2005, a rise of 132.102. Caltex rose up from Rs 446 million to Rs.1255 million during the same period or 181.39 percent.
The reduction in the prices of petrol and diesel by Rs. 4 and Rs. 1 per litre again smacks of government's preference for the elite rather than common man against all its claims and rhetoric for the welfare of the masses. The elite class, in the private sector and the top official class in the public sector who mostly use petrol as fuel have been the main beneficiary of the decision but not the people from the middle class who mostly use CNG as fuel in their vehicles. Eighty percent of the country's population use buses and wagons, which are run on diesel. Reduction of one rupee in its price is too low to expect any relief for the traveling public. It will only add to the profit of the owners of buses and wagons.
When asked to comment on this anomaly, Advisor to the Finance Ministry, Dr. Ashfaq Hassan Khan came out with yet another funny argument. He said the ratio of petrol and diesel usage in the country is 1:8 times, which means that if diesel price is reduced at par with the petrol price, then the government would have to incur 8 times more loss in revenue which was not affordable. Can anyone beat this argument? One can only conclude that as the government could not afford to provide relief to 88 percent consumers it has started with the upper 12 percent.
In a press statement, former Deputy Chairman Planning Commission and spokesman of PML (N) Ahsan Iqbal criticized the government for giving meager relief to the people by reducing the petrol and diesel prices. He said the government is still pocketing huge profits by importing POL and not passing the 'real' benefit to end consumers as POL prices have come down from $ 80 per barrel to $ 51 per barrel in the international market. It is the level of prices, which prevailed in 2005, when sale price of petrol was Rs.40.50 and diesel Rs.26.40 per litre against the present reduced prices of Rs.53.70 and Rs.37.70 per litre, respectively.
He said the government has given maximum relief to the elite class that uses petrol as fuel in their vehicles but provided insufficient relief to the common man by reducing diesel price by just Re.1. He said the common man uses public transport that runs on diesel and likewise the maximum transportation of edibles, goods, vegetables and fruits is made through diesel-run vehicles. "So the reduction of Re. 1 per litre on diesel would not even help reduce the food price inflation which has become the major source of concern for the common man".
Abrar Ahmad, a representative of Consumer Rights Commission of Pakistan (CRCP), said that he did not agree that the government has given relief to the masses because it should have been done on time, otherwise, it loses its significance.
He said the government should reduce the volume of taxation on POL products for these being consumer commodity. He said since levying taxes on POL products is an easy mode of collecting and increasing the revenue, therefore, the government is bent upon fleecing the common man of the country.
He said the price determination mechanism is also faulty and not transparent and it should be addressed immediately by inducting all the stakeholders, including representatives of the consumers. He said the government is still making money as it has passed on nominal benefit to the masses with regard to the huge volume of reduction in oil prices in the international market.
ORGANIZATION OF THE PETROLEUM EXPORTING COUNTRIES
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YEARLY BASKET PRICE $ / BARREL