The oil price increase of 1st April

HSD prices (Rs 92.89 per litre now) have been enhanced by 13%, while gasoline (Rs 81.06 per litre now) prices by 9.5%, although, it might have been better if it was the other way round. Commenting on the recent petrol and diesel price increase of the month of April, Prime Minister has stated that it is Ogra that increases the prices and not the government.
He is uninformed or partially informed by the bureaucracy. Ogra implements the government policy and even that implementation role is highly limited, as I will attempt to explain in this piece. I will continue to lament on the undeserved high prices of diesel (HSD), and offer a few expositions and possible suggestions. Generally speaking, I am not opposed to the oil price increase for very widely known and understood reasons.
However, the impression that the GoP is subsidising oil is not correct. It is only earning less tax revenue as compared to earlier. The GoP normally budgets revenue of Rs 120 billion in terms of a Petroleum Levy, in addition to the GST. I make a case in the following for equalizing the HSD and gasoline prices at around Rs 87 per litre, which is about 5 rupees higher for petrol and 5 rupees lower for HSD.
Let us take a view of the most current prices in the world. In Europe prices and fuel taxation is very high, and thus may be excluded from our discussion. We would, however, review the oil price in India and in the US, both of which are relevant from different perspectives. In India, the HSD price was last revised in November at IRs 37.75 (PkRs 72.72), and remains unchanged.
The HSD price in Pakistan is 27.73% higher than India. However, the Indian gasoline price (IRs 62.50 per litrer; Pk Rs 120.39) last revised last month in March is 44% higher than in Pakistan. Indian gasoline prices are 65.5 % higher than HSD prices in that country.
In the Gulf Coast USA, the gasoline prices currently are 91 cents per litre (Rs 78), and of Ultra-Low Sulfur Diesel No 2, 102 cents per litre (Rs 87.72), after an increase of 7% in retail prices there. Thus the announced price of gasoline in Pakistan at Pak Rs 83.56 is Rs 5.56 higher. And the HSD price at Rs 92.89 is also Rs 5 per litre higher.
Let us agree to the US benchmark prices, as petroleum prices there are perhaps the fairest and most economically efficient and if one removes the Petroleum Levy and 7.5% tariff on HSD, Pakistan prices would almost become equal to the US prices. However, I would not go along with the idea of high diesel prices vis-à-vis petrol.
I have written earlier that Ogra only calculates price according to the formula and the reference prices provided to it. And even that pretense is limited to about 20% of the petroleum products in value terms. I would invite or rather encourage the reader to visit the Ogra site. Its notification pertains to only gasoline (petrol), Hi-octane, kerosene, light diesel and jet fuel.
HSD is not included in it. Usually, after a lapse of several days, a notification is posted surreptitiously on the PSO website and not even on the Ogra website. There is no evidence that Ogra has been permitted to examine the reference prices or hold a public enquiry on it, a la Nepra; so much about the role, scope and purview or authority of the Ogra.
Let me revert to my sustained opposition to the high HSD prices. HSD prices are Rs 8.14 per litre higher than petrol. HSD is used in public transport, and the effect of its price increase is to be directly borne by the public, which mostly uses the mini-buses and coaches and buses. Also, all long haulage goods transport runs on HSD, and affects food prices and general inflation, sharply and immediately.
For this reason, everywhere in the world, including our region, diesel prices are kept low through lower taxation. The exception is only the US and the UK. In Pakistan also, this used to be the case. Only recently, has this anti-public pricing policy been adopted. The prime minister and the PPP political leadership perhaps are not aware of this little innovation of our petroleum bureaucracy. Let me explain the nature of this "innovation", in the following.
There is a 7.5% discriminatory tariff on HSD as opposed to gasoline, which is not levied on gasoline (petrol). This gives rise to a discriminatory impact on theHSD of Rs 5.31 per litre. Similarly, the reference import price of the HSD is taken as 3.57% higher than gasoline, which gives rise to another Rs 2.32 per litre additional burden on HSD.
As I mentioned earlier, on HSD prices a notification appears surreptitiously after a few days, and it has not yet been posted on the PSO site, where it is posted usually for rather strange reasons. So I do not know yet how much Petroleum Levy (PL) has been slapped on HSD. On gasoline, as per Ogra, a PL of Rs 3.65 per litre has been applied.
We have thus established that the discrimination of at least Rs 5.81 per litre against HSD is not justified. I am not sure, if the remaining differential of Rs 2.32 per litre is justified on merit, and thus would not make a statement about it. Readers may have to wait for it.
There are some practical issues, however, in defence of the policy. HSD consumption is 4 times higher than petrol. In terms of revenue generation, a 50 paisa levy on HSD is equivalent to Rs 2.00 per litre on gasoline. Petrol prices are 45% higher than petrol prices there and in Pakistan reverse is the case, where HSD prices are 15% higher than petrol.
The agitation in the last three months did bring some improvement vis-à-vis this discrimination against HSD, but the previous trend of discrimination against HSD has been restored again in April pricing. It is perhaps the local refining sector that perhaps pressurises the policymakers to do this.
On the other hand, locally produced HSD is only some 40% of the total consumption; 60% of the HSD requirement is imported. Thus out of a Rs 5.31 of import duty, Rs 2.12 go to the inefficient local refineries and Rs 3.2 per litre goes to the government coffers. This would total to about a neat 17 billion rupees. Public has to pay for the inefficiency and super lifestyles of the oil industry executives.
Concluding, we have been counselling the policymakers to limit taxation when international crude prices are high and vice versa. Also, the idea of monthly adjustment may please be reconsidered and revised in favour of say quarterly adjustment, so that the monthly price tussle is alleviated and even the fluctuation may get evened out in a longer period of price adjustment. We would repeat those once again.
(The writer has been a Research Fellow at Harvard University and has recently authored, "Pakistan's Energy Development; the road ahead")