Sep 27 - Oct 3, 20

Amidst the ongoing energy crisis and heightened noise over rising energy prices especially diesel, motor gasoline, CNG and LPG, the government seems to have come to the conclusion for considering to reduce its role in setting prices of petroleum products.

Though the reports have generated a sort of enthusiasm in the petroleum circles especially the oil marketing companies as well as refineries yet the parameters being framed by the government might leave a little room for exploitation. It is pertinent to mention that the judicial commission's report on petroleum prices in 2009 leaves little room for future price deregulation to digress from objectives.

It is a loud thinking in the oil industry circles that the overall policy objectives would revolve around removing inefficiencies, reducing the scope of misuse of freight pool system and of course reducing government's role in price setting.

It would not be out of place to mention that the deregulation of petroleum prices would be a historic decision on the part of the government especially when the oil sector is one of the major sources of revenue to the government exchequer. This positive change would certainly help to bring to an end rumors regarding ambiguity in fuel pricing mechanism circulating for decades.

In fact the reduction of government's role in price setting of the petroleum products, if implemented in letter and spirit, would help ensuring transparency in the oil price mechanism. The fuel price is usually center of discussion in the trade and industry as well as in almost all walks of life because energy prices are linked with the budget of every citizen. It is also said that the deregulation of POL prices would not hurt the government revenues as petroleum prices and other energy segments are a major source of revenue to the exchequer as so far there is no word regarding any change in the levies on the petroleum products.

However, well placed sources said that price deregulation of petroleum products would be a sort of controlled deregulation of gasoline, aviation fuel, and LDO prices. In this respect, the Oil & Gas Regulatory Authority (Ogra) is likely to notify maximum limits on ex-refinery prices, based on import parity prices (IPP) concept. As current ex-refinery prices are notified on IPP, there seems a little upside to product spreads after deregulation.

In case the government did not notify upper limit under IPP, the interplay of competition among refineries, regulation of end-consumer prices and ready import option for marketing companies would keep the ex-refinery prices close to IPP.

According to the sources, the government would continue with 7.5 per cent duty on diesel. It is also said that Ogra will continue to determine prices of Kerosene and diesel.

Besides deregulation of the petroleum prices, the deregulation policy would bring one of the major changes in the oil regime i.e. removal of freight pool system which is currently in vogue while setting the uniform petroleum prices across the country.

Currently the freight cost of the oil transportation from coastal areas to up country is equally divided to all consumers hence the fuel price is charged at par from oil consumers across the country whether in the upcountry or in the remote areas or Karachi.

It may be noted that removal of freight pool system is a decade old idea but was never materialised due to strong opposition by the consumers in the upcountry. However, the concept to deregulate oil prices would leave no option for the distributing companies to add cost of transportation to the far off areas of the country. This would however help the consumers living in the close periphery of the coastal areas.

Recent petroleum crisis in Punjab and Balochistan primarily caused by the flash floods, which seriously damaged the road links disrupting the transportation of oil, forced Parco to close down its operations.

Actually, the disturbed road communication substantially supported the idea of removing the freight pool system as the cost of logistics was too high for carrying oil either from mid-country refinery or from Karachi to rest of the country. Hence, there is a strong case for removal of the freight pool system in the forthcoming policy for deregulation of petroleum prices.

It is rightly believed that Pakistan is an energy rich country. However, despite all energy resources and continued oil and gas exploration efforts, its oil production never exceeded to 58000 to 60,000 barrels a day. The oil production in Pakistan strangely remains unchanged for decades. Hence the country is a net importer of oil to the tune of around 18-19 million tons of crude oil including crude and finished petroleum products costing a heavy import bill of around $10 billion a year in the current scenario.

Since the power generation segment is generally ruled by thermal power system, the major chunk of the costly fuel oil goes to Independent Power Producers (IPPs). Since the imported oil interplays a major role in power regime, the electricity consumers have no option but to pay even unaffordable price of the power they consume.

Under the situation when the government is considering to deregulate oil prices, it is the time to give a serious thought to rationalise electricity prices through quick steps of switching over from costly oil to cheaper fuels to help reviving the idle economy due to increasing cost of inputs having paralysing effects on the industrial sector.

The access of Pakistan textile to the EU market is an exciting development for the textile sector in Pakistan. In order to allow the textile industry to grab the opportunity by producing more and more export surplus at competitive prices, it is the high time for the economic managers to take radical steps to revise down the electricity prices to produce export surplus enabling the industry to compete in the EU market.