ASYMMETRICAL OIL PRICES PRESSURING INFLATION
Jan 19 - 25, 2009
Advisor to the Prime Minister on Finance, Shaukat Tarin, expressed concern over the failure to pass on the benefit of reduction in the international price of oil to the consumers. It has been proved from the official documents that the oil prices in the domestic market are responsible for an inflationary spiral that is severely affecting the common man to meet both ends.
The Petroleum and the Finance Ministries jointly opposed to reduce the price of oil in the domestic market. While before approval of the 7.6 billion dollar stand by facility, the officials have committed in the LoI to the IMF that "fuel prices will continue to be adjusted to pass through changes in international prices." But the reduction in international oil prices have not been passed on to the consumers as promised. The oil price has decreased from $143 per barrel in July 08 to $45 per barrel in January 09.
Petroleum Ministry is not ready to reduce petroleum development levy (PDL) on petroleum products to ease the pressure on the consumers. They argued that the government also committed to bring the deficit to a sustainable level but the budget document has not identified the sources to enhance revenue for the current year.
Moreover, oil is a decisive factor in the production and its inflationary impact is, therefore, not restricted to its own price. It affects cost of power generation, increases transportation cost which in turn enhance cost of production.
On the one hand, the government has reduced the POL prices, but not equivalent to the international market, and on the other the transporters have not reduced their fares for common man and truck charges carrying products from and to Karachi port have also not been reduced substantially.
Some of the officials are of the view that PDL is totally an unjustified levy being charged from oil consumers. Another official group opposed any cut in the PDL and urged the government to continue charging PDL. Petroleum development levy revenue is levied to develop oil and gas sector, but now it is being used to meet the budget deficit. The PDL has made the POL dearer for the consumers. This can be judged from the following details: Rs3 per litre on JP4, Rs3 per litre on JP8; Rs28.15 per litre on petrol; Rs38.35 per litre on HOBC, Rs12.95 per litre on kerosene oil and Rs12.10 per litre on light diesel oil (LDO).
Under this head the government is earning about Rs14 billion per month from PDL and GST on petroleum products from consumers. The government earning is around Rs10.5 billion per month is generated through GST and Rs3.5 billion earned through PDL.
During July-December 2008 the government earned approximate amount of Rs78 billion under the head of PDL and, 16 percent GST on the petroleum products. The government has already collected Rs126 billion from the oil users. It is estimated that the amount of revenue to be generated would reach around Rs150 billion during the current financial year. The oil sector is the major sources of revenue collection; therefore, the Finance Ministry is opposing reduction in oil prices.
In January08 petrol price was Rs53.70 per litre that increased to Rs81.66 per litre in October08, latter on reduced and presently being sold at Rs57 per litre. This increase of Rs27.96 per litre in just ten months has created a run away inflation in the economy.
Long run analysis trend of inflation, measured by 12-month moving average (12-mma) rose to 17.7 percent during October 2008 compared to 7.5 percent in the same month last year. Inflation in Wholesale Price Index (WPI) was recorded at 28.4 percent compared to 11.8 percent in the same month last year.
WPI food group inflation was 32.6 percent in October 2008 compared to 15.5 percent a year earlier. WPI non-food group also registered a higher inflation of 25.2 percent compared to 9.2 percent in October 2007. Sensitive Price Indicator (SPI) also grew and reached 30.3 percent compared to 10.7 percent in the corresponding month last year.
Food inflation, that is mainly affect the common man, remained high caused by increase in the prices of a number of major food items including, pulses, rice, wheat, wheat flour, fresh and packed milk, vegetable ghee and cooking oil.
Non-food inflation is related to the industrial sector, also increased significantly reaching 19.7 percent in October 2008 compared to 5.4 percent last year. Transport and communication, fuel and lighting, cleaning and laundry, recreation and entertainment and education sub-groups witnessed more than 10 percent inflation higher than October 2007.
All sub-groups contributed to this increase, but the OGRA's adjustment in domestic prices of petrol, diesel and CNG were the main sources of increase in inflation in transport and communication sub- group. Inflation in this subgroup was recorded at 39.9 percent during October 2008 compared to (-) 3.1 percent in the corresponding month last year.
Now the government aims that OGRA should play a monitoring role to ensure that the Oil Companies Advisory Committee (OCAC) may not set a price that allows them windfall profit. This decision remained pending for a long time and the consumers continue to pay the cost of this delay.
In spite of extra ordinary profits Oil Marketing Companies (OMCs) have demanded to increase margin from Rs1.13 per litre to Rs1.46 per litre on sale of diesel and 0.72 paisa on petrol. They said refining margins, the difference between crude oil and petroleum products, have turned negative. Oil refineries also want a fixed refining margin of $6 to 7 per barrel.
The multi national companies are pressurizing government to help improving revenues of OMCs and refineries. The oil companies have sought increase in their margin after international oil price reached the lowest level of $35 to 45. They claimed that this reduction has decreased the profitability of OMCs and refineries.
It is to be noted that all the marketing companies and refineries have shown sudden losses in first quarter (Jul-Sep) of fiscal 2008-09 due to the depreciation in the value of rupee and increasing government debts that compounded the impact of oil price slump.
The subsidies on POL have also been phased out. The government owes billion of rupees to oil industry under the head of fuel oil purchases for power production. For instance Pakistan State Oil, the major supplier of fuel oil to thermal power stations, is waiting for weeks for government to clear its debt of around Rs73 billion.
The Pakistan Peoples Party (PPP) has been critical of the windfall profitability of the oil industry in the past years and it has also moved to limit the profits of refineries since coming to power. In August 2008, it reduced the deemed duty for refineries to 7.5 percent from 10 percent on sale of diesel. The deemed duty is a part of the protection of oil pricing system introduced in 2002 and a 10 percent custom duty was also imposed on import of diesel while same was allowed to refineries as part of their revenues.
To bring stability in the market and reducing consumers' hardships the government is planning to review the petroleum product prices on monthly basis and will be notified on first of every month, instead of fortnightly. The new mechanism will also be applicable to refineries. It was claimed that the existing fortnightly review mechanism, had left the consumers at the mercy of petrol pump owners. But the drawback of this decision may be that the benefit of oil prices decreased in international market would not be pass on immediately to the consumers, i.e., they have to wait for days or the hole month.
Under the policy of deregulation, OMCs were authorized to determine and notify the ex-depot sale price of petroleum products in accordance with the approved pricing formula on a fortnightly basis. The fortnightly formula was introduced on June 13, 2001. Later, the subject of price fixation was transferred to Oil and Gas Regulatory Authority (Ogra), effective from April 1, 2006. The ex-depot sale price is determined on the basis of average fortnightly international market price of petroleum products published in Platts Oil gram for Arab Gulf market.
Presently, all stakeholders, including refineries, OMCs, petrol pump owners etc are involved in hoarding petro products to avoid any inventory losses in case of anticipated decrease in prices or to gain from the stocks because of expected increase in prices.
The pump owners and the transporters immediately passed on the impact of a price increase to the helpless consumers, while in case of a decrease; they are reluctant to pass on the benefit to the consumers.
The gas companies have filed a petition with the Ogra to revise the gas prices by 50 per MMBTU from July 1, 2009. But the government is also planning to impose the PDL on the gas to adjust some portion of the reduced impact in gas prices.
Some of the officials also opposed the five percent hike in gas prices as it would hurt the small group of domestic consumers, who used 50-200 cubic meters per month and accounted for 91 percent of the total gas consumers. This group constitutes only nine percent of total sales.