Unpacking the crisis

July 5, 2020

A committee has been formed by the Prime Minister’s Office to look into petrol shortages at a time of excess supply, and assign responsibility

Amidst the on-going blame game between the Oil and Gas Regulatory Authority, the Petroleum Division and the Oil Marketing Companies over a petroleum products supply crisis in June, the Prime Minister’s Office has swung into action and constituted a 4- member committee headed by Shahzad Syed Qasim, the Special Assistant to PM on Coordination of Marketing and Development of Mineral Resources, to look into the causes of petrol shortages and submit its findings by July 10.

In instituting the committee, the PMO has expressed its lack of confidence in the assertions of Petroleum Division and the OGRA with regard to their roles and measures taken to cope with the crisis.

The committee will also look into the role of the Petroleum Division and the OGRA to ascertain whether their actions were prompt and commensurate with the crisis. The committee will also look into the impact of declining prices on import and availability of petrol, hoarding by oil marketing companies, curtailing of supplies from depots to retail outlets; hoarding by fuel stations; whether the availability of petrol, this year, was higher compared to last year; and the impact of Covid-19.

The committee will fix responsibility for the crisis and recommend a course of action to ensure that a crisis does not recur.

A careful look at the chronology of the crisis raises certain questions regarding the role of Petroleum Division. On May 30, the Petroleum Division pitched a summary in the ECC meeting, signed by the petroleum secretary, seeking no further reduction in POL prices for the month of June as desired by the oil marketing companies arguing that reduction in prices will result in inventory for the oil marketing companies. It said they might create an artificial POL supply crisis in the country if action was not taken to protect them. The ECC refused to accept the summary saying the reduction in POL prices was the consumers’ right and that the prime minister had desired that the relief be provided.

After a reduction in prices was notified, the oil marketing companies refused to bring their stocks to their outlets. As a result POL products became unavailable at petroleum pumps other than those served by Pakistan State Oil. Over the first 26 days of June, PSO sustained a Rs 17 billion loss by selling its products at the reduced prices. However, the OMCs suffered no losses as they did not provide their stocks to the petrol pumps. After hoarding FIRs were registered and disciplinary action was taken, the situation started improving after June 16. Still, in most of the KPK, Faisalabad and some areas in Lahore petrol was not available till June 26. When the government finally surrendered to the OMCs cartel by raising the prices, POL products became available across the country within half an hour.

By instituting a powerful inquiry committee, the Prime Minister’s Office has expressed its lack of confidence in the assertions of Petroleum Division and the OGRA with regard to their roles and the measures taken to cope with the crisis.

The failure of the Petroleum Division to act against the OMCs till June 8 raises many questions. Why did it first advocate the viewpoint of the OMCs in the ECC meeting? Why did it not take any action against the OMCs as soon as they started disrupting the supply (on June 1)? Why did it not pitch an action plan before the ECC to ensure POL availability at all petroleum pumps?

It would seem that some Petroleum Division officials were more interested in protecting OMCs’ profits than ensuring the consumers got the relief ordered by the government in view of the declining prices in the international market.

Qazi Wajid, the spokesperson for the Petroleum Division, denied that it was not proactive in coping with the crisis.

Speaking on condition of anonymity, other officers said inventory losses and gains were part of the game. They pointed out that when prices surged, the Petroleum Division had never advocated similar relief for consumers based on the inventory cushion. When cabinet members pressed the issue of non-availability of POL products, Omar Ayub Khan, the energy minister and Nadeem Babar, the special assistant to PM on petroleum, failed to satisfy them.

The net result was that the POL consumers were inconvenienced and denied the relief that was their due while the OMCs defied the government successfully and did not bring the stocks to their outlets at the lowered prices. They will also mop up windfall profits after the hike in POL prices over the next 35 days (4 days of June and 31 days of July). The OMCs (Shell, Total Parco, Attock Petroleum and Hascol) had around 35,000 MT of MS and around 38,000 MT of HSD as of June 26.

Significantly, the government will reap a Rs 46.99 dividend in the heads of taxes (Rs 30 as Petroleum Development Levy, Rs 14.55 as sales tax and Rs 2.44 as custom duty) per litre of petrol. The landed cost of petrol stands at Rs 48.54 per litre. In the next 35 days the government will collect Rs 70-75 billion from the consumers (Rs 45 billion in the head of petroleum levy and Rs 25 billion in the head of GST).

Imran Ghazanvi, the OGRA spokesperson says that the Directorate General of Oil, a part of Petroleum Division, is the authority responsible for monitoring the supply and demand of POL products in the country. The Petroleum Division has the power to allow or ban the import of POL products. Ensuring the maintenance of fuel stocks for consumption of 21 days is the job of the government not the regulator. However, ensuring the storage capacity is the job of the OGRA. He says the country currently has a storage capacity of 30 days for petrol and 50-70 days for diesel oil.

Sources in the Petroleum Division say the country has never had 21 day stocks in a long time. The inventories hover between 10 and 15 days’ consumption.

A Petroleum Division official says the OGRA can cancel the licence of an OMC only after the government sends a reference reporting that it is not maintaining the required stock level.

Currently the DG Oil convenes a Product Review Meeting (PRM) every month. It is attended by representatives of all refineries and OMCs. The PRM examines the current stocks and decides on future imports after assessing production and consumption patterns.

The OGRA has already submitted its report to the Federal Cabinet, pointing a finger towards the Petroleum Division.

The author is senior economic correspondent of The News International.

Unpacking the petrol crisis