REDEFINING GOVERNMENT SUBSIDY ON PETROLEUM PRODUCTS

FUEL PRICE WITHSTANDS SANS SINGSONG OF SUBSIDY

TARIQ AHMED SAEEDI (tariqsaeedi@hotmail.com)
Apr 21 - 27, 2008

The international price of crude oil in a latest shift reached to $115 per barrel as on last week. In a bid to waste not a single moment of profit earning, new government has desultorily surged prices of petroleum products by Rs. 3. Unplanned and uncalculated it seems because of stark disparity in between international and local price rise on oil as well as substantiating government's circumvention over present price structure of petroleum products. Had it not been the difference between ex-refinery cost and ex-depot sales price would have been shortened. The difference is of about Rs. 10 (ref. oil price, PAGE).

Despite considering currency difference of Pak rupee and dollar, increment of few cents in crude in international market results into rupee(s) up in the price of locally consumed motor gasoline, diesel, and kerosene oil. Seemingly, paisa has entirely lost its value. Surging in rates of domestic petroleum products has become a direct proportional to upward revision in international crude price. Factually, indigenous oil production can only fulfill about 30% national energy demand and import plugs residual demand gap. But, international linking must bring forward rationalized domestic oil price instead of imprudent restructuring.

The crude oil existence is highly dependable on the supply of OPEC and non-OPEC members and the global demand. In Pakistan, during 1st July 2001 to 16th March, 2007, price of petrol was increased 46 times and diesel 43 times. Since then, revision was only intended to pull fuel rate up farther. Under the price mechanism defined by the government Oil Companies Advisory Committee was adjusting ex-depot sales prices of petroleum products from 2001 to 2006. As government introduced petroleum sector policy in year 2001, E&P heaved a sigh of relief reemerging out of the stress of tight regime.

At March end of 2006, price determination authority was relegated to the Oil and Gas Regulatory Authority; this decision of government did not receive a welcome from many stakeholders and businesspersons, whose comments contend paranoia about the unbiased price formula set by the OGRA. They argue OGRA is covertly a representative body of oil marketing companies and therefore veracity of its tariff structure is doubtful. They say OGRA is likely to show its favoritism to oil marketing companies while revising tariff of petroleum products.

Whatever may be the altercation, as a matter of fact, anew government is not seriously taking cognizance of the gravity of the eventual crisis that may be stimulated by the unbearable loads on households' budgets due to the continuous petroleum price rise. Each increment in domestic price unleashes direct and indirect impact on all economic quarters. The direct impact of price rise of petrol and diesel compels majority of people to realign their cost of living on transportation, grocery purchases, utility bills, and so and so forth. While monthly income of fixed income group remains standstill or moves up slightly, monthly expenditures are extending multifold.

Typically, manufacturers and sellers earning variable profit margins are least affected by the price hike on petroleum products insofar as their business cycle is concerned. Hardly, their sales touch break even point. Yet, they have to survive in the spiraling inflation and may be confounded in their personal lives. However the indirect impact of petroleum price appreciation also ultimately bears on atrocities for end customer, consumer of oil products sparingly entangles into the confusion of cost cutting. For instance, electricity in Pakistan is mainly produced by thermal power plants that run on furnace oil-byproduct of crude-and hence increase in price of furnace oil may interpret raise in tariff on electricity consumption.

Historically, electricity per unit tariff has been increasing at the behest of swelling dollar value of oil. This time around, consistency in petroleum price graph may stir up extra charges on electricity bill. As a cost cutting measure, retrenchment has also been ideally adopted by large oil consuming companies, somewhat rendering unemployment that potentially batters source of income. For example, new management of KESC has in running rightsizing programme in order to overcome its working capital deficit.

In addition to this, extreme volatility in domestic fuel pries has given unchecked tactics to profiteer of fleecing customers. Now, petroleum price rise is forwarded as a reason of high price tag of any product. The mindset of consumers has been attuned to attribute petroleum rate surge to the price escalation of every consumable items. Whereas, in reality there are many consumer goods that should not relay an exploded price chit once after petroleum price upward revision.

Succeeding governments in the anal of Pakistan's history always propounded a cliché lame excuse of strapped subsidy for price rise of local fuel. However, these subsidies on petroleum products mostly benefiting its patronized departments have not provided a considerable relief to the common people. When HSD and fuel oil price in the international market touched the highest level of US$ 87.12 per barrel somewhere in 2006 government boasted of its achievement to keep the budgeted price of HSD and fuel oil at $ 50 per barrel. Notably, it did not underline domestic cost incurred on these products. This is a mere sarcasm that international price is used as the price determinant of local petroleum products, no matter even if the total cost on local products is far less in foreign currency value. This induces a contention that ex-refinery cost or even ex-depot sale price of local fuel can stand on the position without singsong of subsidy if not compared with the international price structure. Advisably, new government should not repeat mistakes of its predecessors and should detect ways to sustain price level of petroleum products.