UNABATED INCREASE IN PETROLEUM PRICES
SHABBIR H. KAZMI
Oct 1 - 7, 2012
It is true that crude oil prices are hovering above US$100/barrel skyrocketing prices on POL in the domestic market look out of proportion. It is mainly because the Government of Pakistan is collecting billions of rupees as Petroleum Development Levy. According to experts nearly half of the prices of POL products consist of government taxes. The policy planners also ignore the fact that the high POL prices are a source of inflation. Lately, the experts have started saying that inflation in the country has come down to single digit but masses say their purchasing power is declining at a very fast pace. More and more people are being pushed below the poverty line and this phenomenon is being attributed to rising POL prices.
Global crude oil price are volatile because of the geo political reasons. The conditions in most of the oil producing countries are far from satisfactory. Nearly a decade ago Iraq was attacked in attempt to get control of its oil. Now efforts are being made to Iran bow down before the US pressure or face more stringent sanctions. Western media is trying to create an impression that oil exporting countries are making a fortune. This is only one side of the coin but the reality is that most of the oil exporting countries are made to believe they face threat from Iran and should therefore buy more of conventional and non-conventional arms. Saudi Arabia, which is often referred as the biggest oil exporting country has also emerged the biggest buyer of arms.
When one tries to explore factor contributing to higher international crude oil prices, volatile geo political conditions are said to be the prime reason. However, some of the experts say that price of crude oil is not longer determined by its demand and supply but hedge funds. It is believed that since real interest rate in the United States hovers around zero percent investment in oil offers the most attractive option. It is believed that the oil inventories held by these funds are enough to meet the requirements of next ten years, even if not a single group of oil is produced.
Petroleum Development levy has emerged as a major contributor to overall revenue collected in Pakistan. As stated earlier nearly half of the product prices consist of taxes. At times the GoP reputes this accusation, but it has always been avoiding giving breakup of the cost. Some experts say that oil companies have been told to make some of the taxes part of the product cost. They also say that the GoP and even the media refer to New York and London prices, which have no relevance for Pakistan. The country buys bulk of its oil and POL products from the Middle East, the reference should be Arabian crude prices, which are far lower as compared to New York and London prices.
A real disturbing fact is the rising POL imports. Logic being used is 'imported POL products are cheaper than the locally produced ones.' It is often said that prices of imported products are lower as compared to the locally produced ones. It is half truth because local refineries don't have enough funds at their disposal for the import crude oil. Crux of the matter is 'declining capacity utilization of local refineries due to circular debt.'
Some of the experts say that oil marketing companies prefer to import because of the 'kickbacks' involved. There are two common allegations against oil marketing companies: 1) the shipments are always short and 2) they also withhold payments of products not purchased by power plants. However, oil marketing companies say they hardly have any role in the fixation of POL prices.
Till lately oil marketing companies were making millions of rupees inventory gains. In those days they used to stop sale hours before new prices were announced. Now the situation has reversed, the probability of making inventory losses is higher. However, many of the experts don't accept this point of view because 9 out of 10 times the government announced increase in POL prices. It really offends consumers because international oil prices are going down but prices of many are fixed higher. However, the matter is hushed on the grounds that price are fixed keeping in view the emerging trend rather than the past trend.
To conclude it is necessary to say that higher POL prices, including furnace oil, are the main contributors to inflation. Around the world governments pay subsidy on HSD to contain cost of transpiration but in Pakistan diesel sells at higher price as compared to motor gasoline. This trend has to be abandoned to bring the cost of logistic down.
It is also necessary to emphasize use of bio fuel in Pakistan. Producing E-10 does not pose any problem. However, production of bio-diesel poses serious threat. Around the world canola and corn oils are used as additives. In Pakistan these oils sell almost at double the price of HSD. Experts are still of the opinion that bring down cost of corn/canola oils substantially is possible. It only requires better crop management and containing post harvest losses.
However, some experts say that using bio fuels will make canola/corn oils more expensive. Therefore, the government should focus on bringing down prices of POL products rather than venturing into using biofuels. They are partly right because Pakistan at an average spends over US$2 billion on import of edible oil. Therefore, making the country self sufficient in edible should be the prime concern, once this is achieved only than any effort should be made to produce bio-diesel.