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May 15, 2019

Oil and reform


May 15, 2019

New and higher petrol and diesel prices have been announced recently. Generally, there is controversy and protest whenever new petroleum prices are announced. We will compare in this space petroleum prices in comparison with other countries, the scope for reduction, and other reform measures to streamline retail oil marketing issues which affect consumers in price and non-price terms.

Gasoline prices are up by Rs9.42 per liter and HSD by Rs4.89. The main reason seems to be higher GST than last month; GST on gasoline has been enhanced from two percent to 12 percent and on HSD from 13 percent to 17 percent. Normal rates of GST on petroleum products are 17 percent. In earlier months, extraordinary reduction in GST was there to reduce the load on people. Perhaps due to the IMF's presence in the capital, the GST reduction could not have been maintained anymore, even for Ramazan.

We find that generally gasoline/petrol prices have been the lowest in Pakistan among the basket of countries that we have selected. And in case of diesel/HSD, Pakistan prices are either comparable or are lower. It is not a convenient selection to prove or oppose a certain point of view. It includes almost all the regional countries and a few developed countries.

A price comparison in USD would be useful; April petrol prices in Pakistan were $0.71 per Liter, as against $1.5 in China, India and Bangladesh. HSD prices in Pakistan in April were $0.87 against $0.85 of India, only slightly higher. However, in Bangladesh, HSD is selling for much less at $0.77. We have recommended in this space changing the HSD pricing policy, however.

Deemed duty is charged on prices but is not collected. This provides price support for local refineries. There is a scope for some reduction in prices by doing away with the deemed duty of 5 percent which is singularly applied on HSD as 7.5 percent. Higher HSD prices affect the goods transport cost and thus the economy and competetiveness. HSD prices are lower almost everywhere than gasoline as we will discuss later in this space. Deemed duty was supposed to be a temporary measure which is lingering on beyond the original intention.

Pakistan is among those very few countries where petrol prices are lower than that of diesel. I have never been able to understand this. I suppose some lame or real reasons may be conjured up in favour of this policy; the poor use motorcycles which require petrol and small delivery vehicles like Suzuki loaders also use petrol. But such is the case in most developing and poor countries like India, Sri Lanka, Bangladesh, Thailand, Philippines etc. Lower diesel prices would result in lower transport fares for the poorest. Motorcycle or taxi users are in a higher economic class than bus or mini users who are the poorest -- although, the poorest in this country can hardly use any form of transport. And then lower diesel prices would bring down goods transport cost, improving competitiveness, and reducing agricultural prices and of other transported goods of public consumption.

It is possible today to have differentiated and higher prices as we are seeing in case of higher octane petrol. It is also possible to sell cheaper low octane (Low RON) petrol such as RON 87 or 90. Low octane petrol can be used by motorcycles and older small cars. High octane fuels cost more and lower taxes could be charged to cheaper petrol of this category. New car models cannot use low octane petrol and thus possibility of misuse would be minimum.

In earlier times, the break-up of petroleum prices used to be published and in this way there used to be more transparency. Now for several years, the break-up is not published for the pretence of unregulated and free prices. This is a pretence only. Ogra calculates the price and sends its calculations to the government which adds taxes and the government announces the final price without revealing the break-up. Does this help or hurt the government? It hurts the government because people are in the dark, not knowing if the increase in prices is due to increase in taxation or due to increase in international prices. In India price break-up is published despite variable pricing in various states due to variable excise duties in the Indian states. It would be strongly suggested that transparency is restored in this respect and price build-up is published.

In Pakistan, transportation costs are equalized through an Inland Freight Equalization Charge. Earlier, this charge was applicable to include transportation cost till individual petrol pumps, which reportedly created many leakages and vices. Now, this charge is restricted up to 48 or so regional storage points. The vices still remain. Corruption, leakages and adulteration persist. This is the price we have to pay in order to maintain equal prices in all regions of the country, a practice many countries including India have done away with. An alternative equalizer could be lower petroleum taxation for northern part of the country. Companies could be left free to charge inland freight cost. After all, there is pretence of freeing the retail prices.

Frequent accidents in oil transportation through trucks and trailers have resulted in the loss of precious lives and loss of limbs and other afflictions. Public hazard has been on the rise due to ever-increasing consumption. The solution lies in laying as many pipelines for crude and finished product transport as required and is feasible. Feasibility is a relative term and is measured with how much value is assigned to human life versus how much cash is available or how many overheads can be tolerated by the market and the people. Pipelines would also reduce the malpractices of Inland Freight Margin.

Adulteration is on the rise, mixing water, kerosene and Iranian smuggled oil. Adulteration is less in high-profile areas and much more in rural and marginalised areas. Both marketing companies and the government are supposed to control this. There is laxity on the part of both in this respect. Petroleum companies trucks and petrol pumps are complicit in it. Administration is supposed to track and control adulteration points and smuggling of low quality oil products from Iran.

There was an issue of metallic additives in petrol for enhancing octane. This was a case of from the frying pan into the fire. Lead was removed and manganese was added. Reportedly, the government has had some handle on it by specifying upper limit to metallic content and has stuck to it. Preferably, oxygenates should be allowed as additives rather than metals. In the longer terms, it is an issue of older designs of oil refineries. Deemed duty was applied with the intention of oil refineries modernization.

Most of the world has already shifted to low sulfur petroleum in the form of Euro V or Euro VI with hardly any sulfur content. Until recently, 5000 ppm sulfur level or more was allowed which is now reduced to 500 ppm in the form of Euro-II. We are suffering from roadside pollution and with time it will deteriorate. It is high time to make plans to move towards low sufur level fuel in the form of Euro-IV or higher. India has already moved to these levels, if that comparison is necessary for action and incentive.

In conclusion, reform is required in petroleum marketing, pricing and distribution. Admittedly, some issues require only a change of mind and other requires resources, logistics and even technology. Perhaps, too many changes at the same time may not be practical. However, a beginning should be made to gradually make diesel cheaper than petrol, make prices cheaper for the poor and remove malpractices.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy

Issues: Success and Challenges’.

Email: [email protected]