Increase in the offing

Dec 03 - 09, 2007

The Minister for Finance in the caretaker Government, Dr. Salman Shah in a press interview last week indicated that oil, gas and power rates may have to revised upward in the coming few weeks because of soaring oil prices in the international market as the government cannot afford to pay the rising subsidy on sale of petrol and petroleum product.

According to information gathered from government sources the caretakers government is all set to give the nation an election gift in the form of about 15 percent hike in the prices of petrol, diesel and Kerosene Oil in the fortnightly review of petroleum prices due on December 1, 2007. According the Finance Ministry there has been no upward revision since January 2007 when government had allowed/reduction of RS. 4 and Rs.1 per liter in the prices of petrol and diesel respectively following a downward trend inn the international market. During the period from January to November this year oil prices in the international market have soared by about 70 percent. For political reasons the outgoing government chose not to pass on the burden to the consumers by providing a subsidy which has by now reached over Rs.115 billion which was unbearable for the country's economy.

Dr. Ashfaq Hassan Khan, formerly an Advisor and now Special Secretary Economic Affair Division, in an exclusive interview in his office on Wednesday, confirmed that an increase in the prices of petroleum products was imminent. "How much and from which date are the questions which I cannot answer as no final decision has been taken so far This increase has become an economic necessity following massive increase in the price of petrol and petroleum products in the international market since we froze our prices on January 16, when last the price of crude oil in internal market was $ 50.58 per barrel while on November 16 it rose to $ 87.8 per barrel showing an increase of over 72 percent. Diesel rose to $ 102 per barrel on November 16 showing an increase of 64.5 percent and that Kerosene rose to $ 108.43 from $ 65.9 per barrel during this period showing an increase of about 64 percent. Continuing Dr. Ashfaq Hassan said, "what is more worrying is the fact this upward trend in the international market is still continuing and today's (November 28) is about 7/8 dollars more than November 16. And it is difficult to predict as to when and where it will stops", he added.

Dr. Ashfaq Hassan Khan was of the view that it was not an economic but a political decision to keep domestic prices freezed since January last and during this period, the government has incurred a liability of over RS. 115 billion which is multiplying (at present lvel of international and domestic prices) by Rs. 13 billion per month as price differential claims of the oil marketing companies which the economy of the country cannot sustain. We must increase the domestic prices linking them with international prices to protect our budgetary estimates as fast as possible. Any further delay would be criminal, he added.

Another source in the Ministry of Petroleum told this correspondent that we have calculated of Rs.7 per litre in the price of petrol, Rs.6 per litre for diesel and Rs.6 per litre for kerosene oil that will be applicable from December 1, 2007. "With a view to reining in the swelling budget deficit at 4 percent of the GDP, the government is left with no option but to pass on the 15 percent increase in oil prices to consumers. If this is not done and if the oil prices in the international market continue to hover around $ 90 and $ 100 per barrel, then the budget deficit would swell to 5 percent of GDP by the end of the ongoing fiscal year". This will also mean violation of fiscal responsibility and debt limitation act, which is unacceptable to the government", the official said and added that it has become necessary to take this unpopular decision otherwise the whole budget would be compromised.

The increase in the prices of POL products was long overdue but the PML-Q government did not take this unpopular decision keeping in view the forthcoming elections. The official admitted that with the increase in the fuel prices the existing food inflation that currently hovers around 14.6 percent would increase sharply, making life much more difficult for the common man.

The crude oil price in the international market registered 166 percent increased during May 1, 2004 to November 16, 2007, from $ 32.96 per barrel to $ 87.79 per barrel. Similarly, the price of high-speed diesel jumped from $ 37.55 to 102.65 per barrel showing 173 percent increase in price. The kerosene oil price rose from $ 40.46 to $ 108.43 barrel. During the same period (may 1, 2004 to November 16, 2007) domestic petrol prices increased just by 45 percent from RS. 36.92 per litre to RS. 53.7 per litre, kerosene by 47 percent from RS. 24 to Rs. 35.23 per litre and diesel by 55% from Rs. 24.37 per litre to Rs.37.73 per litre.

The source, however, agreed that the faulty pricing mechanism which was introduced by the oil marketing companies advisory committee in 2001 when this responsibility was taken away from Oil and Gas Regulatory Authority (OGRA) and entrusted with oil marketing companies. This faulty decision/formula which has multiplied the profits of oil marketing companies and petrol pump owners without any moral justification is still prevailing despite the fact that the responsibility of fixing sale price of petroleum products has again been entrusted to OGRA. Under pressure from the former Chief Justice.

The faulty price mechanism in practice for the last over 6 years provided profit on the final sale prices including government t axes to the oil companies at the rate of 3.5 and 4 percent respectively. With every increase in the sale prices would provide an additional windfall for oil marketing companies and dealers. "God forbid, if US Administration decides to attack Iran and oil prices soar to $ 150 a barrels and consequently our domestic prices are increased the profits of oil marketing companies and dealers will further multiply. For what service one fails to understand". It is high time that we revert to old formula of fixed profit to companies and their dealers, the source emphatically demanded on condition of anonymity.

The petroleum deregulation initiated by the Musharraf administration in 2000 led to an increase in the oil companies margin and the dealers, commission from a fixed 22-25 paisa per litter to 3.5 percent and four percent respectively on final sale price in 2002. This automatically brought windfall earnings to dealers and oil marketing companies as the international oil prices spiraled.

To make things worse, the government allowed the calculation of the commission and the margin on the final sale price of petroleum products, including taxes and government levies, in such a way that they worked to the disadvantage of the national economy and domestic consumers. Further, the government delegated the regulatory powers of price companies oil companies Advisory Committee (OCAC) Special investigations by the audit authorities and the National Accountability Bureau (NAB) and their reports against this loot were swept under the carpet. Whether or not it was by design, an act of omission or commission is not the issue at the moment. The fact remains that the industry continuously earned profits beyond the principles of fiscal propriety and prudent economic policy.

It was only in 2005 that adverse newspaper reports, objections b the audit authorities and consumer protests and criticism forced the government to transfer the price fixation authority to the Oil and Gas Regulatory Authority (OGRA) but that too under a pre determined straitjacket pricing formula.