Deregulating versus regulating oil prices

Energy plays a pivotal role in any nation’s economic development and there are many different sources of it, including natural gas, solar electricity, nuclear power, biomass and biofuels, wind energy, water and geo-thermal. These energy sources are crucial for accelerating a nation’s social and economic growth as they bolster domestic transportation, businesses, and households.

Oil products have grown to be a significant part of the whole energy encyclopedia and have an entrance to the lowest end of the market. In foreign countries, the downstream oil market-place is open and provides free access to every organization or independent player; this leads to deregulation of oil market.

‘Deregulation’ is the elimination of the control of the government from a sector or a particular industry and to allow them to do free trade in an efficient market-place. Deregulating the oil market would mean that there would be no support from the government in the form of Inland Freight Equalization Margin (IFEM).

The cost of inland movement borne by a refinery for the transport of crude oil from the source to the refinery is known as the Inland Freight Equalization Margin (IEFM).

As a result of deregulation, there will be competition in the delivery of the services and this will enable the consumers to make a wide range of choices in the quest for their satisfaction. For the understanding of deregulation, one must first have to understand the regulation, as we know that there is no smoke without fire, so that is why there is no deregulation without regulation.

Regulation means any legal tool or legislation or any type of executive policy or an element of the constitution or the political socio-economic control by the government.

Traditionally, prices of petroleum products in Pakistan have been regulated by the government itself. So the Oil Marketing Companies (OMCs) present in the country, namely, Pakistan State Oil (PSO), Shell Pakistan, Total, Be Energy & Hascol, have been selling their regular and premium petroleum products at similar prices throughout the country.

This regulation in the oil industry has had its stumbling blocks - the greatest being financial uncertainty for OMCs, since petroleum pricing is a popular political tool. Whereas, deregulation on premium petroleum products has been a meander for an industry going through a dead-heat. If the government goes ahead with deregulation it would have an uncooperative impact on the consumers.

There will be a cynical reaction from the public by imposing this policy but it can be effectively countered by public awareness. But if we look in the longer term, the costs of petroleum will rise right away post-deregulation but will fall over time as new businesses enter the market and competition increases. After deregulation oil companies will charge pricing according to demand and supply forces; they can be guaranteed of a more stable financial outlook.

This market-driven pricing will also encourage product differentiation, supply chain cost optimization, and superior forecourt services - all benefiting the end consumers. Ultimately, deregulation of petroleum prices will help the oil refineries invest more and more in the oil industry and the Oil Marketing Companies would also be able to expand their storage capacity and retail networks.

Deregulation can be at best, in concept, an informed move by the government if done right and will provide businesses the chance to order and store petroleum goods at reasonable prices. Along with potentially lowering prices in some areas, it will increase the number of new jobs available to the occupants by encouraging foreign and domestic investment.

In Japan, for example, after the complete deregulation of electricity in 2016-17, the gas sector was also deregulated. As a result of which, oil, gas, and telecommunication sectors directly set foot in electricity retailing.

In opposition to deregulation in Pakistan, factors such as rising fuel prices, the hoarding of fuel, a loss of revenue for the government, as well as the political cost for the government play a huge role. These factors can have dignified implications towards deregulating the sector.

Deregulation is a pragmatic approach of the government, and it will create opportunities for the companies to order and stock fuel products economically. Not only will it create competitive prices, it will also create a lot of new job opportunities for people.

The government should provide a good policy structure, thus clearing the way for ease of doing business to get the positive impact of deregulation on Pakistan’s economy. No doubt, it’s a prolonged process and a very time consuming exercise.

It is important to consider the interests of a diverse set of stakeholders, especially those of customers and key players in the sector. Favoring one over the other can result in severe negative consequences for the government.

Copyright Business Recorder, 2022