Feb 11 - 17, 2008

A petroleum derivative, LPG is used worldwide as an alternate clean source of energy. Its overall consumption is presently just three per cent of the total world energy requirement yet its potential as a future option is huge. In case of Pakistan, the consumption is still low less than one per cent. It is mainly used by the transport sector as an alternate to CNG to avoid investment in CNG kit and to benefit from the portability option. The domestic sector not covered by the national grid and pipeline network uses LPG as heating and cooking fuel. LPG derived mixtures of hydrocarbon gases are fast replacing the use of hydrofluoric carbons (HFCs) as refrigerants to reduce damage to the ozone layer. But the flammability of LPG hydrocarbons restricts their use in some highly sophisticated systems.

The constituents of LPG are propane and butane. The normal mix is 60 per cent propane and 40 per cent butane. This mix can be altered with the changing seasons - in winter more propane and in summer more butane. LPG is manufactured during the crude oil refining process. At normal temperature, LPG will evaporate. It is therefore supplied in pressurized steel bottles normally leaving 15 to 20 per cent bottle space empty to allow for any thermal expansion. LPG is non toxic, non corrosive and free of any additives.

As a popular cooking fuel, LPG has been used in India, Hong Kong and Brazil, mostly by the urban population. Developing economies especially Asian economies present great opportunities for LPG to develop as a cheaper and environment friendly source of fuel.


While addressing the first LPG Conference held in Pakistan last year, the president of the World LP Gas Association James Rock all acknowledged that the issue of LPG pricing especially import price parity was of critical importance to the industry in Pakistan. He added, "As a policy, the World LP Gas Association favored free market forces to determine the prices. However, whatever move is made, it should avoid the shock effect on the social fabric". He also sounded a note of caution on the issue of subsidies as there is always an ultimate downside to it.

He was partly correct as the decision to introduce import price parity taken in January 2007, failed to bring in any worthwhile new foreign investment. The import also did not pick up as 41,000 tons of LPG was imported in 2007 as against 39,000 tons during 2006 recording a nominal increase of five per cent. According to the figures released by LPG Association of Pakistan LPGAP, import met only 6.9 per cent of the total demand during the import price parity period. The economic decision makers were made to understand that there was a latent annual demand for 4,000 tons of LPG as against the domestic production of 1,700 tons only. This could be proved right when some future projection exercises are undertaken. What they disregarded was the fact that the LPG demand in Pakistan is elastic and highly sensitive to any unusual price change. In any such event, only the transport sector is left to wrestle with the price change situation while the household sector swiftly shifts to cheaper alternatives dismissing outright the green house effect philosophy. Oblivious of this basic fact, the local producers" price was changed from Rs.17,000 per ton to a capped price of Rs.40,000 per ton, linking it with the Saudi Aramco Contract Price.

Regarding subsidy issue, Mr. Rockall's views will have to be seen in a perspective that suits our developing economy. In India, LPG prices are subsidized by the government. Any increase there in LPG prices triggers public unrest fraught with serious political repercussions.


Fazed by the failure to achieve the desired results, the government reversed the decision of import price parity after causing a lot of commotion in the LPG sector. The proponents of the price parity mechanism still feel that the government acted in haste. According to them the policy was designed keeping LPG future in mind; the latent demand story was also true. The local producers won't be able to meet the increased future demand and importing companies will have to take charge. What LPG industry needs is a clear breakaway from the local producers" hold that has little interest in qualitative improvements. Only better infra structure and international safety standards can attract foreign investors. This requires huge investment outlay. The local producers are averse to the idea of competing with the foreign investors.

The local producers sitting on the other side of the table argue that the importers contribute only 5 to 6 per cent of the total LPG market. Any government policy aimed at promoting the interest of five per cent minority is bound to shake the confidence of majority stakeholders. They also contend that a local product must be sold at domestic prices to be determined by the market forces. The farcical import price parity mechanism not only forced the household users to shift from a cheaper and clean heating and cooking fuel to some alternate toxic fuel but also subjected the poor rickshaw and taxi drivers to a great deal of hardship. They feel that LPG importing companies connived with some government policy makers to launch the price parity rocket.

It was not only importers versus local producers but the LPG associations of marketers and distributors also jumped in to make the confusion worse confounded. The claims and counter claims by LPGAP and LPGDAP created quite a few smoke screens making it impossible to fix blame for the shortage of LPG in Lahore and for its price hiking up to a level of Rs.140 per Kg.

The moral of the story is that the ultimate sufferers, as usual, were the end users who invariably happen to be the people with no say or a meek voice. The recent cut in LPG price by OGRA and LPGAP to Rs.63 per Kg is, reportedly, being resisted by the distributors and the retailers who are selling the commodity at their own prices.

By this time, the economic policy makers must have learned their lesson that in the deregulation era it is not good to play with the commodity prices. Let the market forces decide what to sell and at what price.