OIL PRICES & INFLATION - STILL NO RELIEF IN SIGHT

SHAMSUL GHANI (shams_ghani@hotmail.com)
Jan 19 - 25, 2009

The meteoric rise of inflation from single digit to a whopping 25 per cent was being conveniently blamed on three figure oil prices. The dramatic drop in oil prices from $147 a barrel to $40 a barrel should have brought down the inflation swiftly to at least its original level. Since this has failed to happen, one must look for some serious systemic flaws. The huge relief in international oil prices has not been passed on to the economy. Rather it has been criminally gobbled up by the OMCs and the so called democratic government with the result that the domestic inflation is inching back as compared to the miles of relief in oil prices.

The headline inflation measured through CPI has come down to 23.34 per cent in December from 24.68 per cent in November and from 25 per cent in October, 2008. The core inflation (non-food and non-energy) declined to 18.8 per cent in December from 18.9 per cent in November 2008. The snail pace retrieval of core inflation owes much to the rising house rents and medical care cost. In the wake of a real estate market slump, house rent hike is something really out of the box. The house rent index has risen by 17.56 per cent and medical care cost by 12.67 per cent. Food inflation came down to 27.92 per cent in December from 30.44 per cent in November 2008.

The new government (now not so new) should not look for lame excuses; instead it should immediately settle long outstanding issues with the OMCs with regard to the anomalous pricing structure and withdraw all undue benefits for passing them on to the economy. It should also desist from targeting oil as a source of profits and revenue at the expense of the masses and the economy. To release the economy from the clutches of recession, the glaring oil policy flaws will have to be revamped forthwith. The new petroleum policy recently unveiled by the Economic Coordination Committee has dashed all hopes of any improvement in the ongoing process. The people's government has stepped into the shoes of their predecessors by choosing not to interfere with the OMCs' dictatorial ways. Perhaps it has gone a step further by pocketing the windfall savings resulting from plummeting oil prices. A recent Dawn editorial says:

"Much to the public's disappointment, the government seems to have buckled under pressure now - or has it? Perhaps not, as it sheepishly admits that it has been pocketing an amount upwards of Rs.50bn over the past six weeks through the petroleum development levy and sales tax on petroleum products as global oil prices tumbled, not sharing the sum thus pocketed with the OMCs and petroleum dealers."

So, now it is the unholy alliance between the government and the OMCs that the economy and the masses have to grapple with. The government is now openly on the side of the OMCs as the finance ministry officials have made it clear that they are morally bound to raise the margins of the OMCs and dealers after the sharp decline in the international oil prices. Nobody is talking of the huge ill-gotten profits already amassed by this middlemen cartel.

There is already much room for adjustment in the anomalous price structure and deemed duties enjoyed by the oil marketing and refining companies since long. If the accounts are settled with retrospective effect, the cartel will still have to pay back something to the government and the economy. Our democratic Messiahs have not only reaffirmed the much questioned immunity to the oil cartel (OMCs and refining companies) but have also ruthlessly blocked the benefit of steep fall in oil prices from going to the consumers and the economy thereby allowing a renewed lease to the diehard inflationary forces. Whatever reversal in petrol and allied product prices has taken place is way far from the actual drop in international prices of crude. Presently, the crude costs us Rs.20 a liter. Accordingly, petrol price should be roughly in the range of Rs.35-40 a liter after factoring in all refining costs, taxes, duties, and margins.

The oil cartel - an oligopolistic formation - 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 the sufferers.

The cartel comprises Pakistan State Oil, Pak Arab Refinery, National Refinery, Attock Refinery, Attock Petroleum, 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 the 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.

The IMF conditionalities have imparted some sort of control to our rudderless economy. The slight drop in the inflation rate during the last two months owes much to the IMF condition under which the headline inflation rate is to be brought down to 20 per cent by June 2009. Perhaps IMF, while setting the target, couldn't accurately forecast the extent of drop in oil prices or else the target for us should have been 15 per cent or less instead of 20 per cent. Our creditor organization would do well to revise the target to put pressure on the government to bring down the inflation much faster.

This being a realistic revision, will put the government under obligation to employ all available means to pass on the benefits of falling oil prices to the consumers and the economy. The means are there in the shape of high OMCs margins, uniquely bizarre GST and government's undue reliance on oil as a source of profit. Our governments have developed a habit of taking only as much pain as they can conveniently take. They need some outside force to make them work honestly.