Create a ministry of energy

After successive increases over the last few months, the government on 31st May decided to reduce petroleum products' prices by up to Rs 5.05 per litre in line with the reduction in global oil prices with effect from 1st June 2011. The price of petrol was lowered by Rs 1.70 to Rs 86.71 per litre, high-speed diesel by Rs 3.20 to Rs 94.11 per litre and kerosene oil by Rs 5.05 to Rs 84.65 per litre.
However, no change was made in the prices of light diesel oil and high octane blending component (HOBC). Certain other decisions, which could have a profound impact on the trade and pricing policy in the domestic market, were also announced while making a downward adjustment in oil prices this time.
The prices of all petroleum products were deregulated with an improved monitoring role for the Oil and Gas Regulatory Authority (Ogra) and guaranteed inland freight equalisation margins the (IFEM) is to be abolished after due permission from the Federal Cabinet.
According to the Federal Minister for Petroleum and Natural Resources, under the new scenario, Ogra will have nothing to do with the fixing of POL products' prices and its role will be restricted to submit quarterly reports on the pricing of petroleum products, indicating the trend in the international markets and the prices announced by the OMCs/refineries along with their findings and suggestions, if any, on a regular basis to the ECC.
The deregulation will not be unfettered, however. The refineries and OMCs would be bound to keep the prices of their products lower than the PSO's average actual import prices of the previous month, excluding incidentals and wharfage. The import parity prices was expected to trigger a healthy competition between the OMCs and refineries to sell their products.
The IFEM was, however, not being phased out at this stage because of political resistance. Whether the government will be able to sell the idea of abolishing the IFEM in future is hard to predict due to stiff opposition from provinces that are likely to be adversely affected by the implementation of the decision. Although, the decrease in domestic oil prices was in line with the downward trend in the global prices, the decision was likely to have a soothing impact on the economy and ordinary people of the country.
Accustomed to regular increases over a fairly long period of time, the public at large would feel a sense of relief as they will not be subjected to another bout of inflation induced by the rise in domestic oil prices. Industrial activity could also pick up a little bit, resulting in somewhat better prospects for employment. Coming immediately before the Federal Budget, reduction in oil prices could be considered as a measure of some comfort when the going is tough.
The decisions to deregulate the oil prices and abolish the IFEM are, however, much more important than the expected monthly adjustment in oil prices. The government would benefit from the decision because it will no more be blamed for raising the domestic oil prices in future as the ordinary people would be able to clearly observe and experience a direct connection between the oil prices in the international and domestic markets. The deregulation decision, according to Petroleum Minister Asim Hussain, would also provide a saving of about Rs 10 billion to the government due mainly to the discontinuation of payment of price differential claims (PDCs) to OMCs and refineries. It was also a good news for the end-consumers due to the expected intense competition between the OMCs and refineries to sell their products at lower rates. Also, arrangements have been made to ensure that prices are not jacked up beyond an upper cap, which will be kept in place by the government.
This was considered essential to check monopolistic practices. The new mechanism, therefore, has the potential to increase efficiency and bring in more competition. However, since the domestic pricing under the new system would still be closely related to the international market and Pakistan is highly dependent on the imported oil, huge gains to the economy could only be expected when the international prices would tend to stabilise at a lower level.
In the meantime, however, we would urge upon the relevant stakeholders to stop resisting the abolition of IFEM as the proposed action would not only be in accordance with the spirit of a deregulated regime, but would also remove distortions and curb corrupt practices in the system. The oil marketing companies must be given the freedom to fix dealer commissions and their own margins. They have to operate within the upper limit of import parity price of POL products. And, above all else, there has to be renewed focus on jacking up exploration and production for oil and gas within the country.
E&P policy needs to be suitably amended to attract more investment by raising the linkage of domestic gas at the wellhead to international oil prices to 60 to 70 percent. Pakistan offers excellent prospects for gas finds. We need to incentivize the return to E&P companies in order to attract international major producers to invest in the country.
The country needs an integrated energy development plan. By 2025, total energy needs met through domestic sources are expected to fall from 72 to 38 percent.
Total energy demand over the next 20 years was expected to go up by 350 percent. Hydel power role in the energy mix, after the completion of dams being constructed will rise from 15 to 20 percent. Sixty-eight percent of the needs will be met from thermal energy, ie oil, gas and coal. Sixty percent would be met through oil and gas import which will increase Pakistan's import bill to $124 billion (projections made by Goldman Sachs, Morgan Stanley and others). Through political will and resolve the energy import bill can be halved to $62 billion. Current fragmentation of responsibilities between the Ministry of Petroleum and Water and Power is an obstacle towards implementation of an integrated energy plan. Both ministries need to be merged into a new ministry of energy to overcome the existing energy crisis. It is time we realise our folly in regard to weak institutions, inappropriate pricing policies and insufficient investment. Unless, Pakistan moves to address the present chronic energy shortfall, the country will not only pay a huge cost in economic sense but also in terms of serious social unrest which will impede social cohesion and public goods provision.