Navigating petroleum pricing: Need to introduce deregulation

Introduction: The intricacies of Pakistan’s oil pricing system, tethered to the fortnightly determination of prices, have sparked conversations about its efficiency and the potential benefits for consumers.

To shed light on possible improvements, a comparative analysis of pricing models in neighbouring countries like India and Bangladesh, as well as global exemplars such as the UK and Canada, is essential.

Additionally, understanding the roles of regulatory bodies, similar to Pakistan’s OGRA (Oil and Gas Regulatory Authority), is pivotal for effective oversight in the dynamic petroleum market.

India’s pricing model: India’s approach to petroleum pricing stands out for its dynamic model overseen by the Petroleum and Natural Gas Regulatory Board (PNGRB).

Unlike Pakistan’s fortnightly adjustments, India implements daily (6:00 AM) pricing updates based on global factors, ensuring consumers experience real-time reflections of market conditions.

Since the deregulation of petrol and diesel prices in 2014, Oil Marketing Companies (OMCs) such as Bharat Petroleum Corporation Ltd and Hindustan Petroleum Corporation Ltd have been revising prices daily.

The transparency of the pricing mechanism in India involves the Petroleum Planning and Analysis Cell (PPAC), falling under the Ministry of Petroleum and Natural Gas, overseeing the revision based on international product prices, taxation, transportation, and other costs.

The final retail price is calculated as the sum of the price at which dealers buy from OMCs, excise duty, dealer’s commission, and state government VAT.

The litre price variation among states due to VAT charges incentivize reduced pricing, as states compete to reduce VAT without imposing a financial burden on the federal government.

Notably, the absence of certain fixed margins like Inland Freight Equalization Margin (IFEM) fosters healthy competition among dealers, encouraging efficiency and better service for consumers up and down the country.

Bangladesh’s fixed pricing system: In contrast, Bangladesh adheres to a fixed pricing system regulated by the Energy Regulatory Commission (BERC). While providing stability, this model potentially limits market dynamics and competition. Initially implemented to shield consumers from volatile global oil prices, this approach has revealed several weaknesses.

The heavy government interference in Bangladesh’s pricing mechanism often results in political considerations, influencing pricing decisions. Consequently, products are priced below their actual costs, imposing a financial strain on the state-owned oil company, Bangladesh Petroleum Corporation.

Forced to sell petroleum products at prices lower than actual costs, the company accumulates significant debts, compromising operational efficiency and hindering investments in infrastructure, technology, and employee training.

Moreover, the fixed pricing mechanism diminishes market competitiveness by discouraging private sector participation. A more competitive market could foster innovation, efficiency, and better services for consumers.

The financial constraints imposed by the current pricing model limit the state-owned oil company’s capacity to invest in modernizing and expanding its infrastructure, leading to supply chain inefficiencies and hindering the company’s ability to meet growing consumer demands.

The accumulated debts of the state-owned oil company are unsustainable in the long run, jeopardizing its ability to maintain consistent product supply and invest in environmentally sustainable practices.

Global examples – UK and Canada: Turning our attention to global models, the UK adopts a market-driven approach that ensures competition among retailers.

While prices are influenced by international market trends, market forces play a pivotal role.

In Canada, with its vast oil reserves, availability and pricing are managed through a combination of market forces and strategic government interventions.

Regulatory bodies, such as the Office of Gas and Electricity Markets (Ofgem) in the UK and Canada’s National Energy Board, play crucial roles in overseeing competition and ensuring fair market practices.

Ofgem in the UK focuses on promoting competition and safeguarding the interests of consumers. Similarly, Canada’s National Energy Board oversees energy pricing and market fairness, contributing to a balanced and competitive energy market.

Role of regulatory bodies: Globally, regulatory bodies play a pivotal role in overseeing petroleum markets. In the UK, Ofgem ensures competition and consumer protection, fostering an environment where market players compete to offer the best services and prices. In Canada, the National Energy Board provides oversight to maintain fairness in energy pricing, ensuring that market dynamics benefit consumers.

Implications for Pakistan: Considering these global models, Pakistan could contemplate a phased deregulation strategy. Empowering OGRA to calculate the daily price of each petroleum product and conveying it to OMCs and dealers, while maintaining IFEM initially, could foster healthy competition.

Presently, Ron 95/97 is already deregulated in Pakistan, demonstrating the feasibility of such a model. Similarly, lubes are completely deregulated resulting into free availability at most competitive prices.

Despite potential resistance from certain segments of the petroleum supply chain, engaging in a constructive dialogue with stakeholders is crucial. Deregulation has proven its utility in promoting efficiency and optimal pricing for consumers, as evident in the free market competition among OMCs for lubes and high-octane fuel prices.

The current system, with predetermined margins for OMCs and dealers, promotes status quo and lethargy. Both OMCs and dealers know they receive a guaranteed return on each litre, discouraging innovation and competition. Phased deregulation could break this stagnation, encouraging OMCs and dealers to optimize their businesses, achieve efficiency, and offer competitive prices and services to consumers.

Presently, after every two weeks, OGRA calculates the prices of the petroleum products followed by a longish official movement of summaries by Petroleum and Finance Divisions resulting into the fixing of the products after final nod from the highest political office in the country. The alternative should be that OGRA may notify prices daily after incorporating the values of all constituent variables of the pricing formula.

Conclusion: In conclusion, the petroleum pricing strategy in Pakistan can benefit significantly from lessons learned from diverse global models. A careful analysis of regulatory frameworks and pricing mechanisms in countries like India, Bangladesh, the UK, and Canada can guide Pakistan toward a more responsive, competitive, and consumer-friendly petroleum market.

Balancing the interests of stakeholders while prioritizing consumer welfare will be crucial in shaping the future of Pakistan’s petroleum pricing. A phased approach to deregulation, coupled with active engagement with industry stakeholders, can pave the way for a more efficient and dynamic energy market that ultimately benefits the consumers and the overall economy.

Copyright Business Recorder, 2023