Money Matters

Pricing puzzle

By Usama Qureshi
Mon, 04, 24

Usama Qureshi

Pricing puzzle

In Pakistan, the term ‘petrol bomb’ has taken on a unique connotation, as it is frequently invoked by politicians and media alike whenever there’s a hike in fuel prices. This term dramatically politicizes the issue of fuel pricing, which, in reality, often lies beyond the direct control of the government and oil companies.

Fuel prices at petrol pumps in Pakistan have sharply increased over the last few years, significantly impacting the purchasing power of the masses and driving inflation higher. In the past three years, pump prices have more than doubled—from Rs 115 per liter in July 2021 to just a few rupees short of Rs 300 per liter today. This substantial rise has been a big factor in pushing inflation into the 20 percent to 30 percent range, severely affecting many who are already struggling to meet basic needs like food and housing.

Fuel prices tend to be lower in oil-producing countries, especially in the Gulf region, and higher in oil-importing nations. For instance, in the UAE and Saudi Arabia, petrol prices range around Rs200 and Rs220 per liter, making it cheaper than in Pakistan. Conversely, oil importing countries like India and Bangladesh, petrol costs exceed Rs 300 per liter, positioning it as more expensive than in Pakistan.

Still, the public’s frustration with rising fuel prices is understandable, given how it directly impacts their daily lives. However, this discontent should not be exploited for political gains, media ratings, or social media clicks. Instead, it offers a crucial opportunity to educate the public about the factors driving these increases and to discuss potential solutions that could stabilize the nation’s economic trajectory and alleviate the burden on its citizens.

The government has raised taxes on petroleum products, with the petroleum levy reaching a record of Rs60 per liter on petrol and diesel—the maximum permitted by law. Pakistan is not alone in using fuel taxes as a revenue source. Governments around the world commonly use fuel taxes as significant sources of revenue. Taxes on fuel often represent a substantial portion of the final retail price consumers pay at the petrol pump.

In Pakistan, the pricing structure for fuel also includes margins for oil refineries, marketing companies, and dealers, as approved by the Economic Coordination Committee. These margins, though a small component of the overall price, are critical for the viability of the petroleum industry. Even minor adjustments could threaten the financial stability of companies within the sector, many of which operate on very tight margins and are barely surviving.

The Pakistani oil industry has faced significant challenges due to the devaluation of the local currency, an economic slowdown, and reduced fuel demand. Rising borrowing costs have further strained the sector financially. Unlike other industries that can pass increased costs onto consumers, oil companies must absorb these expenses themselves.

Additionally, the companies’ credit lines are in Pakistani rupees, which have depreciated significantly, while commodity prices are in US dollars. This discrepancy has hindered their ability to procure crude oil efficiently and has severely impacted their liquidity. The above factors have led to significant losses for many oil companies recently.

As an oil-importing country, Pakistan has no control over the international oil prices, and we have limited US dollar reserves - which is the standard currency for commodities. This puts us in a tough spot. The combination of rising global oil prices and a weakening Pakistani Rupee against the Dollar naturally results in higher local fuel prices.

To determine final pump prices, Pakistan uses the 15-day average price from Platts, a globally recognized pricing agency which publishes the international oil prices. Due to the Rupee’s depreciation, this dollar-denominated price has significantly increased, leading to higher prices at petrol pumps.

The time has come to depoliticize fuel prices by fully deregulating them, allowing oil companies to set prices based on international market trends. The government should foster free and fair competition within the oil industry, encouraging companies to attract customers by offering the best quality fuel at the lowest prices. Naturally, only those companies will survive in this market who can satisfy the customers. Meanwhile, the government’s role should be confined to collecting taxes from petroleum products and ensuring compliance with licensing regulations.

Even under full deregulation, the government could still exert considerable influence over fuel prices through its stakes in oil marketing companies and oil refineries. By utilizing its oil companies to offer competitive pricing, the government could attract consumers and set market trends.

The key element is that full deregulation of fuel prices can truly empower consumers by giving them the choice of which oil company’s products to purchase. It could also spur the creation of a new ecosystem around fuel prices, including apps that guide consumers to the cheapest fuel sources.

The potential benefits of deregulation are substantial, but they hinge on its comprehensive and genuine implementation. True deregulation should encompass all commodity prices and involve all relevant stakeholders. This critical issue demands thorough consultations with industry participants, such as local refineries, ensuring their involvement in the decision-making process to achieve effective outcomes.

The matter of oil pricing must be completely depoliticized and deregulated in letter and spirit, giving oil companies the autonomy they need to rejuvenate the sector.

The write is a corporate leader