‘Margin increase vital to Pakistan’s energy security’

KARACHI: Margin increase for oil marketing companies (OMCs) is vital to energy security in the country as this will ensure an uninterrupted supply of petroleum products from the regulated sector, a think-tank said on Wednesday.

The Islamabad Policy Institute (IPI), a nonpartisan, independent policy research institute, advocated a 16 percent interim increase in margins of oil OMCs proposed by the ministry of energy’s petroleum division due to inflation and rupee devaluation.

“The timely step of OMCs’ margins increase now is the right one to ensure the sustainability of the industry and its ability to continue smooth operations and ensure uninterrupted supply of petroleum and lubricants to the Pakistani consumer as well as to keep the wheels of the national economy running smoothly. It is an important step towards the ease of doing business also,” IPI’s Distinguished Fellow on Energy Sector Ilyas Fazil said.

“The pricing of petroleum products is a sensitive issue, especially because the prices are regulated by the government. In doing so, he said, the government has to strike a delicate balance between the interests of the consumers and that of the downstream sector of the petroleum industry.” Fazil said OMCs are fully reliant on the margins fixed by the government for their cost recovery in the absence of price deregulation.

“The revisions, since 2014, have, however, not been done in a timely annual manner and this has caused considerable hardship to the OMCs,” he said.

Recalling the history of fixing of oil margins by the government, the IPI fellow said, the economic coordination committee (ECC) of the cabinet had, for the first time ever in 2014 linked the increase in OMC margins to the consumer price index with effect from July 2016.

The last margin increase was from July 1, 2018 for one year. No subsequent raise was given to the industry since then, he said.

The government also decided almost a year back to revisit the existing mechanism for determination of OMCs’ and dealers’ margins “in a holistic manner and devise a revised mechanism for the purpose of ensuring the interests of all stakeholders particularly the consumers,” he said.

Fazil said the cost of doing business for the downstream sector has undergone a sea change over the last decade. The factors impacting the OMCs’ margins, in addition to the overheads and marketing costs, include costs for 20 days’ stock cover, 40 tons petrol storage requirement per operational retail outlet, and rupee devaluation.

“These factors, which significantly raise the investment and capital requirements, must also be taken into account while considering the adequacy or otherwise of the margins increase,” he said. “Therefore, albeit delayed, the margin increase is in line with the principle in vogue since 2014. The calculated increase of 16 percent is also in accordance with the inflation between June 2019 and October 2020.”