PRICING OF PETROLEUM PRODUCTS

THE NEW FORMULA ADDS TO THE HARDSHIP OF THE POOR

SHAMIM AHMED RIZVI
Sep 29 - Oct 12, 2008

It appears that the so called people government is totally oblivious of the difficulties and miseries of the people as it is taking measure after measure to add to the burden of the common man. Contrary to all its promises made to the masses during its election campaign, the present government is following the pro-rich and pro-elite policies of Musharaf/Shoukat Aziz government. In some cases they have left the past government far behind in their pro-rich approach. The latest example is the decision taken by the present government last week of increasing the prices of diesel and kerosene oil and lowering that of petrol.

In March 2007 Shoukat Aziz government was bitterly criticized when due to a fall in oil prices in the international market, it reduced the prices of petrol by Rs.4 a litre and only one rupee per litre in case of diesel. This decision was described by analyst as a smack of preference for the elites. But how you will describe the decision taken by the "People Government" last week reducing the prices of petrol by Rs.5 per litre and increasing the prices of diesel and kerosene by Rs.3.50 per litre?

The explanation given by the government for raising the diesel, kerosene prices that it cannot afford to pay for the subsidies given to the consumers is totally incorrect and misleading. In spite of high subsidy claims the government was earning over Rs.70 billion annually from the scale of oil and oil products. The government collected about Rs245 billion as sales tax and other levies on oil and gas during financial year 2007-08 and subsidized their prices by about Rs. l75 billion, earning a net profit of about Rs.70 billion on oil business.

The government has been talking about subsidies it provided to the consumers on oil products without mentioning much higher revenues it recovered from the consumers on the same products. Had the government removed taxes and surcharges on petroleum products or at least de-linked with unprecedented increase in prices of oil in international market, there would have been no need for subsidies and the economic growth would have remained unaffected, an insider told page. Instead, higher economic growth might have resulted in higher tax revenues, he said, adding this could be one reason for the decline in revenue collection from 21.7 percent of GDP in 2006-07 to about 19.2 percent of GDP in 2007-08.

According to the financial data released by the federal government recently, the government collected about Rs. 89 billion as development surcharge, royalties and others discounts on oil and gas during 2007-08. Besides it recovered general sales tax of about Rs. l20 billion on oil products and about Rs. 35 billion on natural gas sales during last financial year. As such, total revenue collected on the sale of oil products and natural gas stood at Rs. 245 billion. In contrast, the government provided about Rs. l75 billion as subsidies on oil products during the year 2007-08. Therefore, the government earned about Rs. 70 billion of net profit on oil and gas business as a whole after paying Rs. l75 billion in subsidies. Official data suggests that the government recovered about Rs. l4.5 billion as development surcharge on petroleum products, Rs. 20.7 billion development surcharge on natural gas, Rs. l8.6 billion discount retained on crude oil and another Rs. 35 billion as royalties on oil and natural gas, making a total of Rs. 89 billion.

These sources said as the petroleum prices increased in the international market, the government's share proportionately went up because of 15 percent general sales tax. For example, the GST on motor spirit that stood at Rs. 7 per litre on petrol in February 2007 increased to about Rs. l2 per litre in July 2008, and jacked up government revenue by about Rs. 5 per liter. Likewise, the GST on HOB (High Octane Blending Component) increased from about Rs. 50 per liter in February 1, Rs. l3 per liter in July 2008, providing a windfall of about Rs. 4.5 per liter. The GST on kerosene also increased from Rs. 4.60 per liter in February to about Rs. 8 per liter by end of June 2008. The GST on kerosene also increased from Rs. 4.60 per liter in February 2008 to about Rs. 8 per liter by end of June 2008. The GST on diesel also increased from about Rs. 4 per liter in February 2008 to Rs. 8 per liter in June 2008, providing a substantial revenue increase to the government. Apart from GST, the government also kept on charging development surcharge on HOBC that fluctuated between Rs3-12 per liter with the exception of a couple of months when surcharge was done away with on temporary basis. Oil and gas sector was the single largest contributor in the Rs. 385 billion of total general sales tax collection during 2007-08, the officials said.

On the new pricing structure enforced last week, the government, oil marketing companies and oil dealers are pocketing Rs. 31.15 from end consumers in the shape of taxation, distribution margin and commission on one litre of petrol. The new price break-up of petroleum products shows that the government is charging Rs. 27 in taxes on one litre of petrol which includes general sales tax of Rs. ll.26 and petroleum development levy of Rs. 15.89. Oil marketing companies are charging Rs. 1.70 as distribution margin and dealers Rs. l.95 as commission. In addition, poor consumers also pay Inland Freight Margin of Rs. l.35 on one litre of petrol.

Total consumption of petrol in the country in one month stands at one billion litres and it can easily be calculated that the government is earning Rs27 billion in revenues on petrol in the shape of taxes from the consumers. The landed cost of petrol stands at Rs. 69.05 per litre and if all taxes, margins, dealers' commission and Inland Freight Margin are included then the price of one litre of petrol will escalate to the newly notified price of Rs. 81.66. On-one litre of HOBC, the consumers are paying Rs. 41.17 as taxes, distribution margin and commission and the new price stands at Rs. 96.08. The government is minting Rs. 34.36 in shape of taxes on one litre of HOBC which involves Rs. 21.11 as development levy and Rs. l3.25 as sales tax.

According to the new price break-up, the landed cost of HOBC stands at Rs.79.96 but is being sold at Rs. 96.08 per litre. On one litre of kerosene the government imposes sales tax of Rs. 8.53 and does not charge petroleum development levy. OMCs are charging distribution margin of Rs. 1.22 on one litre kerosene oil. The consumers also pay Rs. l.69 per litre as Inland Freight Margin. The landed cost of kerosene oil is Rs. 51.65, but it is being sold to the consumers at Rs61.87 litre. As far as light diesel oil (LDO) is concerned, the government is not charging petroleum development levy, rather it just imposes general sales tax of Rs. 8.28 litre. However, OMCs are charging R.1.22 on one litre of light diesel. The consumers also pay Rs.2.71 as inland freight on LDO. The fussily and anomalous pricing mechanism devised and following by the government during the last 7/8 years has benefited everybody involved in this trade at the cost of consumers while it has caused more than Rs.200 billion losses to the consumers in last 7 years.

The domestic oil price adjustment announced by 'the Oil & Gas Regulatory Authority on Monday last, takes away a lot more in cash from consumers than it actually gives. On the one hand, the regulator has cut the petrol price by 5.8 per cent, and on the other, it has raised the prices of high speed diesel by 5.4 per cent, light diesel oil by 6.2 percent and kerosene by six per cent. According to a report the government stands to lose Rs. 75m a month on account of the reduced petrol prices. But, at the same time, it will rake in a hefty sum of Rs. 4bn to Rs. 4.5bn by raising the diesel and kerosene rates the two products that form approximately 90 percent or even more of the country's total oil consumption.

The slash in the petrol price has apparently been made to pass on to the common man the benefit of the substantial reduction in the global oil rates over the past few weeks world prices have shed over 40 per cent of their value to $98 per barrel from the record high of $147 in July. The government was under intense public pressure to cut the petrol prices in view of the falling global crude markets. The cut in petrol prices will have a limited effect, that too mostly in the urban areas. The impact of the increased diesel and kerosene prices is expected to be far more comprehensive and across-the-board. An overwhelming majority of the country's population, already trying to cope with the accumulative effect of the 47 percent power tariff rise in two months, will be further burdened. The prices of diesel and kerosene have already swelled by 77 percent and 84 percent since February. The higher diesel rates are likely to fuel food inflation, which is already touching a level of 35 percent on account of the rising transportation and agriculture input costs as most tube wells are powered by diesel.