FALLING OIL PRICES
NO CONSUMER RELIEF IN SIGHT
SHAMSUL GHANI (firstname.lastname@example.org)
Oct 27 - Nov 02, 2008
In March 2008 - the era of three-figure oil prices ñ this scribe had written:
"As if the soaring inflation resulting from the external as well as internal factors was not enough, the caretakers have added fuel to the fire by twice increasing oil prices to break the back of the common man. The option not to increase the oil prices by applying cut on oil marketing and refining companies" margins was always there which the caretakers have so conveniently ignored in usual feudal style. The new government should not look for excuses; instead it should immediately reverse the two price hikes to identify itself with the masses rather than stepping into the shoes of its predecessors. There is much a room for adjustment in the anomalous price structure and deemed duties enjoyed by the oil and refining companies. With the power of people on their back, the new set up should not dither from opening the "Pandora's Box" of anomalous margins and duties and settle the long outstanding issue on an equitable basis".
My wishful thinking came back on me and the democratic setup broke all records of oil and energy price hikes under the time-worn pretext of removing subsidies for long term economic benefits. As a result, the inflation entered the historically highest range of 25-30 per cent. The previous government was criticized for allowing the oil marketing and refining companies to dictate their terms, but in all fairness, previous government's inaction did not hurt consumers as oil prices were almost frozen. Our democratic Messiahs have not only reaffirmed the much questioned immunity to the oil cartel but have also ruthlessly passed on the oil price increase to consumers giving a spiral impetus to the inflationary forces.
What really shocks is that, after a more than 50 per cent drop in international oil prices during a very short period of time, no reversal of increased oil prices seems in the offing. India, after freezing its domestic oil prices for an extended period of time, also raised its oil prices but reversed its action as the prices took a nosedive. It has recently allowed Rs.17 per liter relief to its consumers on gasoline.
TIME ABOUT TO BUST THE OIL CARTEL
The oil cartel ñ an oligopolistic formation ñ has had maintained its unholy alliance with certain government quarters to unjustly benefit from price anomalies heavily biased in their favor. The economy and the consumers have been sufferers. The cartel comprises Pakistan State Oil, Pak Arab Refinery, National Refinery, Attock Refinery, Attock Petrolium, Pak Refinery, Shell Pakistan and Caltex.
To cartelize the issue and to take a uniform stand on matters of mutual interest, the infamous ploy of common directorship has been used. The involvement of government functionaries can not be ruled out as such scams can not survive too long without state support. The main planks of the anomalous price structure are: selling of diesel with one per cent sulfur content for a price meant for 0.5 per cent sulfur content diesel; drawing of 5-10 per cent deemed duty without effecting any upgrading of refining facilities, charging of exorbitant inland freight under the name Inland Freight Equalization Margin (IFEM), etc.
Under some mysterious calculating procedure, IFEM on HOBC is being charged @ Rs.12 per liter as against an actual of less than a rupee per liter. The leeway enjoyed by the cartel has made the company bottom lines swell to inexplicable limits. Their windfall profits are all consumers' money and need to be returned to them through downward revision of all POL product prices from back dates. The previous government is said to have shelved a NAB report suggesting corrective measures to rationalize the distorted POL products price structure.
The present government has no plausible reason to withhold action on this report. A recent article by a former economic consultant NAB highlights the issue as follows:
"The NAB's detailed enquiry report may be made public and its financial implications be updated with the current international prices based on the actual ECC and Cabinet decisions so that the prices of POL products are fixed on the basis of parameters approved by the ECC and the Cabinet. This will considerably reduce the prices of the POL products to the benefit of the economy and the consumers".
The newly appointed financial advisor to PM has definitely caused some ripples in the "dead sea" of our economy. While his "over my dead body" type statements have been taken with a pinch of salt, yet his serious efforts towards generation of much needed external liquidity have rekindled hope of economic revival. After firming up the IMF financing, which now appears to be the only way out, he should focus on correcting the domestic imbalances. The rationalization of POL products pricing structure by plugging all "money making holes" will have an invigorating effect on the economy. The much needed cut in the POL product prices will set the economic wheel rolling besides giving oxygenating relief to masses.
While Shaukat Aziz withheld action on NAB report, let Shaukat Tarin be the one to initiate it. The country's economy should no more be allowed to remain hostage to a few oil marketing and refining companies. The unholy cartel needs to be busted once for all.
While the busting of cartel may well be a short term measure, the need to focus on long term initiatives will still be there. The cost-push inflation caused by the oil price hike should now subside. We produce 64% of our energy from oil, gas and coal based generations. Besides increasing domestic oil output, we will have to gradually do away with the use of oil for power generation. New investment in the field of oil and gas exploration will have to be attracted by offering incentives to the local and foreign investors. These incentives should be well thought out and based on a win-win theory. We have sufficient gas reserves which, if properly exploited, can give our economy a real break. Another option is to switch from oil-based to coal-based energy. Coal is globally considered as one of the most important source of energy. Coal based energy projects require mining facilities and supporting infrastructure. Thar project should have been operational by know.
"Friends of Pakistan" have rightly denied us any bailout. The opportunity to attract them towards investment oriented cooperation is knocking at our door. We must not miss this opportunity that has come our way like 9/11. The major areas of cooperation could be the use of Thar coal for energy through value addition, construction of smaller dams to boost hydel power generation besides propping up the much needed expansion of agriculture sector, and finally, import substitution based industrialization.
To sum up, solution to the present economic and financial crises lives behind our inhibitions and decades-old syndrome of paranoia and is to make use of whatever assistance comes from whichever source.