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July 8, 2019

Pakistan and energy prices


July 8, 2019

Oil prices have not been raised in Pakistan this month but gas tariff has. We have earlier discussed in this space why electricity costs are high in Pakistan. This creates a motivation to examine how energy cost in Pakistan compares with other countries which we have tried to do in this space here in the following.

Pakistan’s gasoline prices ($0.75 per litre) are still the lowest in the region, with Indian and Bangladesh gasoline prices at $1.05 per litre. Pakistan, Indonesia and the US have comparable prices. In Europe, petroleum is traditionally taxed very high. Germany and the UK among other countries have gasoline prices in the range of between $1.63 and $1.68 per litre.

Low gasoline prices are at the expense of diesel prices. Pakistan HSD prices are at $0.845 per litre, while Thailand and Indonesia have roughly the same prices. HSD prices are also lower than that of India ($0.95) but higher than Bangladesh ($0.77). In Pakistan, HSD prices are higher than gasoline, which is not a very desirable situation. This scribe has been proposing for a long time to correct the situation. This situation is mostly due to applying all the deemed duty (7.5 percent) on HSD. HSD is used in public transport which is used by the poor; goods are also transported mostly by diesel vehicles, which affects cost of production and inflation and competitiveness. Therefore, in almost all countries of the world, HSD is cheaper. In Pakistan also, HSD used to be cheaper. The government is requested to review this situation. We have proposed cheaper gasoline prices for motorcycles elsewhere also.

LPG prices have been reduced lately to PKR1330 per 11.8 kg cylinder, which makes it $0.383 per litre, which is almost the lowest in the world except oil-exporting countries. In India and elsewhere, LPG prices are 75 percent higher. However, CNG prices are highest in the region at Rs136 per kg as compared to India (PKR102) and Bangladesh (PKR78). The protest by CNG dealers is unfounded. At CNG prices of PKR136 per kg, CNG is 75 percent that of gasoline in terms of MMBtu, and maintains its competitiveness vis-à-vis gasoline. LPG is 38 percent more expensive than CNG. It is a separate matter whether the current CNG price gives them fair profitability.

Bangladesh has increased gas prices only a few days ago by 34 percent. Bangladesh gas prices are the lowest in the world – even lower than that of the US. Of special significance is the rise in industrial tariff from $2.66 to $3.66 per MMBtu, a rise of 37.6 percent. Its industrial tariff is $3.66 per MMBtu as compared to $4.01 in the US; the latter is perhaps one of the cheapest gas producers in the world due to its shale resources. Pakistan’s industrial gas tariff at $7 per MMBtu is comparable to or slightly lower than that of many countries in Europe and Asia. It appears to be quite adequate. Special Tariff for zero-rated industries (textile, leather etc) has been kept at PKR786 ($5.24) per MMBtu. Can Pakistan go down to as low as Bangladesh tariff of $3.66? Almost impossible.

Indian prices are twice or more than this (there is some confusion in this respect). In Bangladesh, gas companies had demanded a new tariff. Currently, it does create a difficult situation for Pakistan’s textile industry, but if Bangladesh continues with its current energy pricing policies, its energy/economic situation may reach the same situation in next three to five years, as Pakistan is facing now. Bangladesh’s gas resources are also depleting as is the case in Pakistan. Bangladesh has also started inducting more and more LNG, as is being done by India too. It is wondered if there is some provision in WTO rules to address the unreasonably low gas prices, lower than the cost.

However, Bangladesh is charging PKR1665 per month from single-burner homes and PKR1872 per month, which is the poor man’s gas tariff. In Pakistan, the corresponding tariff is one-tenth lower. Pakistan is charging only 16 percent of the cost of production from this group. If this logic of helping the poor is accepted, then there should be similar price reduction for other products and services. It is illogical to handle the poverty issue through one sector only. It is not possible to correct the situation in one go. Prices in this category should be brought to a reasonable level in near future. In India, there is no special tariff for natural gas, although there is subsidy on LPG. Indian gas tariff for domestic customers is $12 per MMBtu vs $10 for the highest slab consumers in Pakistan. There are not many gas tariff slabs in the gas sector in India.

Pakistan’s highest gas slab in the domestic sector, at $10, is comparable to the one in the US. It is also comparable with the domestic tariff in South East Asia. In Europe, it is 50 percent or more high. There are normally two gas slabs in most countries, especially in Europe, unlike Pakistan where there are about 20 slabs.

Fertilizer is another controversial sector in terms of gas pricing. Very low gas prices are afforded to this sector (PKR300 per MMBtu). The logic is food security. Some people have questioned the logic of promoting this sector which is essentially found in gas-abundant countries. There is another argument that fertilizer prices are not regulated. The power sector also gets somewhat lower prices but they are regulated. The same should have been done in this case as well. Fertilizer prices used to be regulated some time back.

Pakistan has real problems with its electrical or power sector. It is beset with high cost of supplies and distribution losses, theft and much other inefficiency. We have dealt with it in a separate article in this space .In Pakistan electrical tariff is almost twice than many countries including India and Bangladesh. In India, there are different electricity prices in different provinces. In some cases the difference can be to the order of 100 percent. India has two systems; one low price-low quality regions run by public-sector utilities which dominate the sector in most provinces. Prices are much lower in these regions where low oil and hydro prices also contribute to lower tariff. There are other areas which are run by the private sector and offer quality service. In Pune and Mumbai and some other areas, the domestic tariff of large customers is as high and even higher than it is in Pakistan(PKR20 plus) while public-sector prices offer PKR10 for the same category.

Like Pakistan, India also has many tariff slabs. The poor man’s tariff is as low as PKR3.26-6.63 per kWh. Industrial Tariff in India (Gujarat) is 6.231 USc per kWh – matching the world’s lowest in France, U.S., and Vietnam. In other countries of South East Asia, industrial tariff is higher at 8.36 USc in Thailand and USc 7.47 in Indonesia. At 13 USc, Pakistan’s industrial tariff is higher than that in most European countries as well. Subsidized tariff for the domestic sector is responsible for this as well.

It would be of interest to comment on some trends in electricity pricing in South East Asia. In Indonesia, Malaysia and Vietnam, industrial electricity prices are quite low, almost 50-60 percent that of domestic tariff. While in Thailand and Singapore, there is not much difference between domestic and industrial tariff.

In conclusion, Pakistan’s gasoline, diesel and LPG prices are on the lower side if compared with most other countries. These prices can be further brought down if procurement inefficiencies are removed, to put it mildly, an area which time has come for the government to address this. Gas prices are more or less comparable and electricity costs are high, although it is difficult to make a generalization. For the poor, the rates are exceptionally low but comparable with the region. Efforts should be made to bring down electricity cost and tariff.

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

Issues: Success and Challenges’.

Email: [email protected]