IRREGULARITIES IN PETROLEUM PRODUCTS PRICES

S.M. ABBAS ZAIDI,
Research Analyst
, PAGE
May 11 - 17, 2009

The importance of domestic petroleum industry for the economy of Pakistan cannot be underemphasized as an issue of national security, self-reliance, and generation of government revenue. Pakistan's average daily production of crude oil in 2007-08 was 70,205 barrels. Pakistan's current crude oil production meets only 18% of the total demand of domestic consumption. The balance requirement is imported involving large expenditures of foreign exchange.

In Pakistan, the prices of petroleum products are not controlled. Though local market should reflect the shift in prices in the global market, yet that is not the case. When the market is not efficient it allows some people in position to benefit and sometime the personal benefits outdo the national interest. The oil markets in Pakistan are influenced by factors other than the demand-supply fundamentals.

PRICES OF OIL PRODUCTS IN PAKISTAN
PRODUCTS JP-1 JP-4 JP-8 PREMIUM
MOTOR
GASOLINE
HOBC KEROSENE OIL LIGHT DIESEL OIL INTERNATIONAL
MONTHLY OIL
PRICES PER BARREL
8-May 67.33 65.7 76.2 68.81 80.77 41.44 44.59 119.39
8-Jun 84.9 80.05 94.81 68.81 80.77 41.44 44.59 128.33
8-Jul 82.1 76.79 87.79 75.69 88.85 49.73 49.05 131.22
8-Aug 86.11 79.45 92.16 86.66 96.08 58.37 56.5 112.41
8-Sep 75.34 72.13 81.39 86.66 96.08 58.37 56.5 96.85
8-Oct 69.01 64.36 75.04 81.66 96.08 61.87 60 69.16
8-Nov 50.9 42.66 57.01 76.66 96.08 61.87 60 49.76
8-Dec 42.54 33.55 48.48 57.66 72.08 51.87 48 38.6
Jan.09 35.89 31.4 41.71 57.66 72.08 51.87 48 42.38
Feb.09 35.62 33.54 41.46 57.66 72.08 51.87 48 41.41
Mar.09 31.22 32.58 37.07 57.66 72.08 51.87 48 45.78
Apr.09 31.83 33.5 37.67 57.66 72.08 51.87 48 50.21
May.09 36.17 37.06 42 57.66 72.08 51.87 48 50.41
Source: OGRA

PETROLEUM POLICIES

In 1991, Government of Pakistan introduced the first petroleum policy document. This was followed by petroleum policies of 1993, 1994, 1997, 2001 and 2007. Policy 2007 was replaced by petroleum policy 2009 as the new market conditions warranted urgent changes required for investment promotion in view of increasing international energy prices. It also reflects the resolve of GOP to accelerate exploitation of indigenous natural resources by attracting foreign investment with technology as well as promoting local companies to participate in Exploration and Production (E&P) activities on a level playing field.

PETROLEUM POLICY 2009

According to the Petroleum Policy 2009, the E&P companies would be given higher returns. A comparison of the offered prices assuming current crude oil price of $50 per barrel shows that the E&P companies would be paid $4.08/mmbtu in 2009 petroleum policy, which was $3.65 mmbtu in 2007 and $2.99 / mmbtu in 2001 petroleum policy. The E&P companies would pay 12.5 percent royalty and 40 percent income tax to the government. The disputed biddable Gas Price Gradient (GPG) factor has been eliminated in the new policy. The discount during Extended Well Test (EWT) phase has been reduced from 15 percent to 10 percent to encourage the companies for early production.

The recent prices of petrol in the international market are hovering around US$50 a barrel. One barrel contains 210 liters of petrol, which means a price of US$0.23 per liter. Now as Pakistani Rupee today is around 80 rupees per dollar that translates in to PKR 19.04 per litre in a barrel. Adding the price for refining and taxation, it comes to around PKR 30. However, the price set by Oil and Gas Regulatory Authority (OGRA) is PKR 57/liter in the country leaving a question mark on the local oil prices.

JUDICIAL COMMISSION ON PETROLEUM PRICES

The Supreme Court has sent a set of questions to the Commission on petroleum prices headed by Justice (r) Rana Bhagwandas for consideration and answers, in a case related to inflated oil prices. The court said that the commission was required to consider and answer the questions on whether the procedure adopted by the Oil Companies Advisory Committee (OCAC) was transparent in fixing the prices of petroleum products between June 29, 2001 and April 1, 2006, in pursuance of Section 8 of the Petroleum Products (Petroleum Development Levy) Ordinance, 1961, as amended on June 29, 2001, without taking consumers/stakeholders on board.

The court's questions also seek to identify the beneficiaries if the procedure was not transparent. According to the court 'If the prices are to be fixed, in view of the prices of oil products in the international market, why were consumers not allowed to benefit from the decline in prices in the international market from June 2001? Does the government during the period commencing from June 29, 2001 to April 1, 2006 and later levy the reasonable taxes? Should the benefit of profits, government earn from the prices of oil besides receiving taxes, not be passed on to consumers?

CONCLUSION

The price set by OGRA is PKR 57/liter in the country and an excessive profit is being earned by oil companies in Pakistan. It is another sign that the government is failing to satisfy its citizens by not curbing and controlling the oil companies. The uncontrolled rise in oil prices in the country has caused an inflationary trend with commodities and other such basic items costing two to three times more than a year ago.