Fuel for a motorbike

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

The prices of petroleum products have increased once again in the wake of a hike in international oil prices. The PTI-led government has charged only the petroleum development levy and not the usual 17 percent GST to keep the prices low. Almost all governments impose taxes on petroleum products pass on the burden of a surge in prices to end customers.

Most governments and politicians in the developing world, on the other hand, prefer to keep the prices as low as possible to maintain their popularity and power. In most oil-producing countries in the Middle East, oil prices are lower than even its distribution cost or a bottle of mineral water.

In Pakistan, petroleum prices are the lowest in the region – Rs160 per litre as compared with India’s Rs243 per litre. The main problem is the depreciation of the rupee due to which petroleum prices in Pakistan have increased disproportionately in a year amid high inflation. The future looks even bleaker as international oil prices have passed the $100 per barrel mark amid the Ukraine crisis. If this happens, it would create further hardship for the country’s poor and the lower-middle class.

Pakistan has a considerate pro-poor tariff policy in the energy sector as is indicated by low tariff slabs for small consumers. Subsidised tariffs are also responsible for a rise in circular debt in the electricity and gas sectors. The petroleum sector, for a variety of good reasons, could not introduce a pro-poor pricing mechanism. Perhaps the government is already overstressed by the existing subsidies in addition to IMF pressure.

Reportedly, the government is considering some kind of subsidy for motorcycle users, who are mostly poor or fall in low-income groups. There are millions of motorcycle users, consuming some 40-50 percent of the total gasoline consumed in the country. There are two possible approaches for this subsidy; the first one is to transfer the subsidy through the Ehsaas programme, and the other one is through introducing a separate brand of gasoline under a low-octane system.

Currently, RON 95 and higher octane is available in Pakistan. Until 2020, it used to have RON 92. Previously – until 2017 – the country had RON 87. Higher octane fuels are required by new and modern vehicles with an electronic ignition system. Older vehicles and motorcycles have a carburetor system and can run on low-octane fuel.

Our proposal is to introduce low-octane fuel – RON 87 – for motorcyclists and old car users. It will be easier and cheaper to market such a fuel product. Our existing refineries produce RON-87 gasoline as a standard product. They usually add environmentally injurious additives like manganese compounds to enhance the octane rating to 92 or higher, which costs more and consumes the vitally needed foreign exchange reserves. For motorcycles, the addition of such an additive is not required – even though it could be necessary for cars. And the industries will do nothing extra and produce an environmentally-friendly product.

At Rs10-20 per litre, a cheaper petrol product can be targeted for motorcycles. The cost of additives – which is Rs5 per litre – can be cut down. Also, low tax rates in the form of lower petroleum levy and possibly reduced GST. At present, the per litre petrol price has a levy of Rs12 and no GST. The 7.5 percent duty on diesel can also be shifted to the conventional gasoline of RON 95 and higher, creating space for the proposed low-octane gasoline.

Opponents may argue that some motorcyclists may not like the low-octane fuel as it would be difficult to kick-start their vehicles. Our answer is that they will not be forced to buy the cheap and low-octane product and they can buy the more expensive petrol. We are aiming at those who are finding it difficult to meet both ends and would welcome cheaper petrol and a motorcycle that can meet their daily needs.

Some renowned Pakistani experts support this proposal. Many foreign experts have adopted the same line of thinking. Here is a quote from a leading international petroleum advisory group:

“Lower octane grades, with octane number lower than RON 90 or AKI 85, are still available for use in motorcycles, very old vehicles or off-road applications such as fishing boats, agricultural machinery or small spark-ignition engines of non-road mobile machinery (NRMM). They are continued to be used primarily in the developing regions of Africa, Latin America, Russia and CIS and parts of Asia Pacific and the Middle East.

“For example, in Indonesia, RON 88 is used primarily by motorcycles. Low octane gasoline grades fully dominate the gasoline pools of Bolivia and Yemen, while they account for the majority of gasoline pools in Colombia, Ecuador and Iran. Generally, these are the reasons behind the continued use of lower octane grades: availability of a cheaper grade to consumers as compared to higher octane grades which are more expensive. This applies to several developing countries; old refineries with slow or no upgrades are not able to increase octane without compromising gasoline supply, and have chosen to keep the octane limit low; lack of domestic supply of octane enhancers (e.g. CIS countries); and they act as a protective grade for very old on-road vehicles especially those in the developing countries. For example, Egypt has vehicles as old as 50 years old and continues to have RON 80 available on its market.”

Eventually, these countries may shift to higher octane levels but may like to maintain the price differential slot for motorcycles and older vehicles for the same reasons as we have.

As for the remaining rich or hi-octane users (those who buy cars worth Rs4million and higher), it appears that there is a scope for high taxes and prices – as they can afford them. The surplus earned from this category can finance the petrol price subsidy to poor motorcyclists. Newer cars and imported ones are fuel-efficient. Also, such a step will promote fuel efficiency and discourage unnecessary driving. There is no denying that my unpopular opinion will irk the relevant classes, but they should understand the situation.

There is also a proposal for cheaper diesel which is used by public and goods transport. Higher diesel prices cause inflationary prices in these sectors, creating financial problems for low-income groups. Most countries maintain some gap in gasoline and diesel prices by levying a low tax rate on diesel. This practice is common in South Asia, South-East Asia and Europe. Only the US does not have this policy. Perhaps under undue USAID influence in earlier years, Pakistan adopted the same pricing policy. Previously, it had the policy of differential petroleum pricing.

All policy proposals have a set of pros and cons. I am not the kind of person who sees a hike in petrol prices as a conspiracy. Every policy has some affectees and consequences. What we need is to measure the severity of negative consequences and come up with their possible solutions.

Email: akhtarali1949@gmail.com