Deregulation of LPG pricing

Following a significant decision at a special meeting on Friday, Caretaker Prime Minister Mohammadmian Soomro directed the Oil and Gas Regulatory Authority, (Ogra) to delink the price of Liquefied Petroleum Gas from the Saudi Aramco control price, thereby reverting to the situation back as it was a year ago.
One of the arguments behind the reversion is that as over 92 percent of our LPG requirements are met from local production, it made little sense to link it with international price. The strength of the argument becomes obvious from a price comparison between the periods that preceded and followed former Prime Minister Shaukat Aziz's decision to make the linkage. The reported price in April 2006 was around Rs 17000 per ton, which jumped to Rs 25000 per ton in December last year; now it is Rs 45000 per ton.
That amounts to an extraordinary surge of almost 300 percent within a short span of one and a half years. It would be hardly surprising if such a price surge in any situation elicits howls of protests from common consumers. Considering that LPG is generally seen as a fuel of necessity for people living in the less developed areas lacking access to piped gas, such a price surge calls for remedial measures.
In order to control pollution in the cities public transport must be encouraged to use LPG. Removal of the ban on the use of LPG by the transport sector has brought about substantial expansion in the market. Owners of small vehicles, especially auto rickshaws, responded with great enthusiasm to the new move, immediately installing LPG cylinders without taking the necessary safety precautions. Setting up LPG filling sites, has been slow and long queues of car owners can be seen on pumps waiting for buying LPG.
Non-Standard LPG kits and unsafe cylinders are being filled in densely inhabited areas, endangering public life and property. The lurking danger resulted in a tragedy a while ago when LPG cylinders stored in a Lahore residential neighbourhood accidentally exploded killing and wounding several people. It is about time the relevant safety regulations are also strictly enforced all over the country.
LPG quotas allocation by the government as political patronage or obtained through kick-backs from the rentier class was common in the 1990s. Probes by the former Ehtesab Bureau and NAB did result in some arrests. However, no convictions could be obtained. Governmental interference or arbitrary fixing of price has been the cause of distortions. LPG is a by-product obtained while refining crude oil at the refineries. Therefore, its price is linked with crude oil prices and varies with supply and demand.
The caretaker Government has rightly done away with the issuance of monthly notification of a price. Instead, Saudi Aramco's LPG price will be the maximum price at which LPG can be sold. Domestic producers and importers have been allowed to compete through lowering of distributor margins. It is hoped the government will avoid price fixation in the future as it only results in distortions.
Coming back to the present issue, Soomro justified his decision saying that the consumer interest had to be given top priority. Hence it would be better if the price of such a commodity of daily use, he said, is driven by the forces of demand and supply rather than a government notification. Which is how it should be. The new situation, nonetheless, places special responsibility on regulatory bodies like Ogra and the Market Competition Commission (MCM) (successor of the Monopoly Control Commission) to play a proactive role. While Ogra must ensure that the pricing mechanism takes into consideration the interests of all stakeholders, MCM must keep its antennae up to detect and demolish any trend towards cartel formation.
The need for greater vigilance on the part of this body becomes obvious in view of the fact that in the period between 2000-2006, when the LPG industry functioned in a deregulated environment, complaints were galore about the LPG producers acting like a cartel. They were consistently accused of setting arbitrary retail prices to the consumers' detriment. MCM must monitor the market on a regular basis to ensure the availability of LPG; and that its producers and importers duly complied with other terms and conditions of supply and sales.