Petrol prices

This refers to the article ‘Pricing petrol’ by Syed Akhtar Ali (July 24). It is important to note that petrol, diesel and at least ten other items which are derived from crude oil are ‘joint products’. The cost of production of individual products is indeterminate. In a free market, their prices are determined by the intensity of demand in such a way that total costs are recovered by producers. However, prices of petrol, diesel and some other products are regulated by public authorities which tax them for revenue generation. The economic impact of these taxes is often ignored. Diesel is mostly used by public service vehicles, buses, wagons, trucks, agricultural tractors, railway locomotives and industries and for power generation. Taxes on diesel affect the cost of production and are ultimately borne by people. On the other hand, petrol is used by car owners who are mostly rich. Taxes on petrol is a tax on the rich. Although cars are the most convenient mode of transport for the individual, they are the worst for the economy. Their use involves the highest cost of transport per passenger-kilometre which ultimately affects the economy as a whole – through heavy capital expenditure on roads, the increased import of vehicles and fuel, and congestion on roads which increase the cost of vehicle operation for every road user and also pollute the environment. A commuter traveling by a car needs 20 square foot of space in his/her office, but his/her car occupies more than a hundred square foot of road space for an entire day, reducing road space for other users. Discouraging the use of cars by increasing petrol prices will benefit the economy as it will reduce the overall cost of transport, help the country save up on foreign exchange as it won’t be required to import vehicles and fuel and reduce the cost of transport for remaining road users.

However, if the government wants to discourage car use, it ought to ensure the availability of public transport which, at present, is non-existent. Transit buses operated in all major cities of Pakistan until the 1970s. It was criminal neglect on the part of various governments to let the country’s urban transport corporations die. These corporations should immediately by revived and orders should be placed for the manufacturing of at least 20,000 double-decker buses for big cities. This will cost around Rs200 billion. The cost may be met by the revenue generated through the recent increase in petrol prices. Petrol is presently being sold at Rs118 per litre. There is full economic justification to increase the price to Rs150 per litre. This price is lesser than petrol prices in India – which are close to Rs220 per litre. The proposed increase in petrol prices will provide an additional revenue of at least Rs300 billion. Some part of it may be used for the purchase of buses and the remaining can be used for other activities.

Abdul Majeed

Islamabad