Taming the petrol-mafia

OGRA must answer why the delay in the import of petroleum on the part of OMCs was not noticed immediately

It was in early June that commuters began experiencing fuel shortages in Karachi. Long queues at the petrol pumps and panic buying across the country pointed to something deeply problematic. The shortage, which was fast morphing into a full-fledged crisis, took everyone by surprise because the fuel consumption had considerably fallen because of the country being under lockdown since the middle of March.

The surreptitious hand of the “mafia” was readily discovered. The popular explanation was that falling oil prices in Pakistan in response to the falling international oil prices did not go down well with the powerful oil lobby in Pakistan. So, it was certain that the interest groups hoarded oil, causing the subsequent problem.

A cacophony of deafening allegations and counter-allegations by different stakeholders ensued. Petrol pump owners said that they faced a shortage of fuel supply because suppliers (also known as Oil Marketing Companies or OMCs) failed to supply the required quantity of fuel.

It was believed that OMCs failed to maintain 20-days’ stocks of fuel at their depots as required under the terms of their licences, and also delayed the import of fuel. Panic buying also played its part in deepening the crisis. OMCs also lifted less fuel from local refineries.

All Pakistan Petroleum Retailers’ Association (APPRA) says all the oil companies except PSO delayed the import of petroleum products and violated the rules regarding maintaining the fuel stock. All Pakistan Petroleum Dealers’ Association (APPDA) also blamed the suppliers.

Given the PTI’s mantra of meting out exemplary punishments to the bad guys, the fuel crisis was an ideal opportunity. On June 10, the federal cabinet took serious notice of what it called an artificial shortage of petrol in the country and Prime Minister Imran Khan ordered punitive action against those responsible for it.

The cabinet directed the petroleum ministry to form joint raiding teams comprising representatives of the Petroleum Division, the OGRA, the Federal Investigation Agency and the district administrations. The teams were to inspect petrol depots and storage houses. The prime minister directed the minister for petroleum and the OGRA to ensure that every oil marketing company maintained 21 days’ stock to meet its license conditions.

The OGRA imposed a Rs 40 million fine on six OMCs and issued show-cause notices to others. The OMCs involed were Askar Petroleum, Byco Petroleum and BE Energy, Shell Pakistan and Total Parco Pakistan Limited (TPPL), Puma Energy, Gas & Oil Pakistan and Hascol Petroleum. The OGRA found that the OMCs had discontinued the supply of fuel to retail outlets in contravention of the terms of their licences.

The governemnt’s reaction to the oil shortage neatly fits into its narrative on accountability and transparency. Riveted by a series of policy failures from fledgling economy to ineffective Covid-19 management and worsening locust attack, ranting against the previous regimes offers the government some cushion.

The government, therefore, joined the chorus that the country was being held hostage by powerful interest groups, whose sinister designs and overbearing presence was made possible by the collusion of previous governments. The corollary was that the PTI should be excused for not performing because it may take a long time to clear the Augean Stables of patronage and nepotism.

The opposition, on the other hand, claims that the very mafia, which the PTI leaders castigate frequently, had played a central role in propelling the PTI to the corridors of power.

Inadequate infrastructure also explains Pakistan’s history of missed opportunities. Pakistan’s disproportionately high dependence on vehicular traffic (tankers) for the transport of oil to upcountry destinations means higher oil prices through higher Inland Freight Equalisation Margin (IFEM).

A parallel theme, which attracted much less public attention but may hold the key to understanding the oil crisis, was the sustained fall in the oil prices both domestically and internationally. A combination of falling interest rates and falling oil prices was expected to put the fledgling economy out of recession quicker than expected. The public did not particularly notice the inextricable link between the oil prices and oil shortages until, to take a leaf from the PTI’s electioneering rhetoric, the government dropped a petrol bomb on June 26.

It is important to see the link between oil shortage and oil prices in the right perspective. After the rollercoaster fall in the international oil prices, Pakistan slashed the oil prices by 33 percent (from Rs 111.59 in March to Rs 74.52 in June). But in one fell swoop, it raised the prices on June 26 by 34 percent. A near-instant resumption of supply after the surge in prices may be sufficient proof that a mafia had created the crisis.

Where did the government err? The answer probably lies in the oil price mechanism and deep-seated structural problems that prohibit Pakistan from benefitting from lower prices. According to PSO officials, the price of Altron Premium (a quality fuel product almost exclusively consumed in motorcycles, rickshaws, and small automobiles) was Rs 116.60, Rs 116.60, Rs 111.59, Rs 96.58, Rs 81.58 and Rs 74.52 in the first six months of 2020, respectively. The price was than raised by nearly Rs 25 to Rs 100.11. The massive price revision came five days earlier than expected.

The international oil prices have experienced unprecedented volatility in 2020. According to the US Energy Information Administration data, a key benchmark of the international oil market, West Texas Intermediate, a blend of US crude grades, traded at minus $40 per barrel in April but reached $40 per barrel in June. Brent Oil, another benchmark of the international oil market, traded at $11 per barrel in April but reached $29 per barrel in May.

This means that the oil prices in the international market hit the rock-bottom in April but began to recover subsequently. Oil prices in Pakistan, however, showed a different trajectory. They began to fall in March and continued the downward journey through April and May and hit as low the bottom (Rs74.52) in June.

Given the fact that oil is traded in futures markets, what factors could explain the countercyclical behaviour in the domestic and international oil prices requires a detailed explanation from the regulator. Pakistan’s structural problems, such as limited storage capacity and suboptimal refining capacity, are some of the reasons behind Pakistan’s failure to benefit from an unprecedented fall in the oil prices in the international market. A limited refining capacity also means that Pakistan has to buy large quantities of finished products.

Inadequate infrastructure also explains Pakistan’s history of missed opportunities. Pakistan’s disproportionately high dependence on vehicular traffic (tankers) for the transport of oil to upcountry destinations means higher oil prices through higher IFEM (Inland Freight Equalization Margin, which is per liter cost that equals across all Pakistan).

OGRA must answer why the delay in the import of petroleum on the part of OMCs was not noticed immediately because there are specific SOPs, failing which the government must take action. If the OMC are to be believed, the energy ministry stopped imports in April and directed them to lift oil from the local refineries.

It is hard to find fault with the argument that petrol demand more than doubled in May (compared to March) and that this was not anticipated. The authority should also analyse how realistic the 20-day storage condition is given the fact that the pipeline for carrying oil to the Punjab and Khyber Pakhtunkhwa has yet to be completed.

Dr Rafi Amir-ud-Din is an Assistant Professor in the Department of Economics at COMSATS University Islamabad, Lahore Campus

Dr SM Naeem Nawaz is a Research Fellow at Punjab Economic Research Institute

Taming the petrol-mafia