Petroleum prices have been maintained at status quo, but as it appears that it may not be possible to maintain the prices at the present level for long. How much price increase is possible or feasible is an open question. In this space, we will explore some solutions and strategies.
In only recent times, the issue used to be how much to tax the petroleum products. Now the issue is, not to talk of taxation, how much to subsidize. International oil prices have gone so high that petroleum taxation has become impossible. In Pakistan, the problem is the most severe due to the heavy Rupee devaluation.
Maximum taxation rates have been pegged at Rs 30/liter as Petroleum Levy (PL) and 17% GST. Assuming 100 Rs/Liter landed cost, there would have been around Rs 50 per Liter taxation. PL would vary with landed cost; if it were high, lower PL would be charged and if PL being low, higher PL rate up to a maximum of Rs 30 per Liter would be charged.
Presently, Gasoline price is charged at Rs 149.98 /L, while it costs Rs.166.95/L, resulting in a subsidy of 29.60 Rs/L. Subsidy on Diesel, similarly, comes out at 73.04 Rs/L, while retail price is 144.07 Rs/L and cost is 208.60 Rs/L.
Current total subsidies on Gasoline and HSD (excluding on Kerosene and LDO, which insignificant) come out to be Rs.73 billion per month or Rs.876 billion per year, if international prices are assumed to remain the same. There is an additional loss of revenue of Rs 900 billion per year in terms of PL and GST.
GoP faces a dilemma; petroleum prices have already undergone a big rise in a year in the midst of a general inflation wherein food prices have also suffered due to food prices inflation in international market as well. There are both budgetary deficits and current account deficit.
A compromise solution may have to be done under simultaneous Demand Management and Rationalisation of subsidies. Subsidy is removed altogether from gasoline so as to increase the gasoline price to Rs 166.95-180/L. However, there will have to be two-tier pricing. Gasoline price may have to be frozen at the current level of Rs 149.98/L for low income group identified as motorcycle users. In effect, this would mean introduction of cross subsidies for the poor, which is widely prevalent in energy sector such as electricity and gas and practiced well.
Subsidy for diesel may have to be halved, reducing it to Rs 36 billion per month. This would increase diesel price to Rs 180/L. Some volume reduction should also help, bringing down the annual total subsidy to less than 400 billion per year. The question is if the resulting price increase would be socially and politically feasible?
We have been arguing in this space for the introduction of a separate brand of Gasoline for Motorcycle users in the form of low RoN gasoline. Carburetor vehicles, older cars and motorcycles, can run on low RoN gasoline, while the newer brands owned by higher income groups cannot run well on low RoN, thus a protection against misuse of subsidy by higher income group using newer cars having electronic fuel injection system.
Some circles from the petroleum industry have opposed it to be impractical on account of logistics that management of yet another fuel brand is not feasible or would be difficult. Their second argument is that, there wouldn’t be much price advantage. Let us take the first argument of logistics first. There is a very large group of motorcycle users of 4 million which can justify separate arrangements and logistics. Separate and specialized petrol pumps can be established. There is no need of new pumps. Some of the existing ones (one-third or so) can be converted to Motorcycle pumps. However, this should be a voluntary scheme. Motorcycle users (and of older cars) can on their choice use a more expensive normal gasoline.
The IMF, reportedly, does not mind subsidies for the poor. The IMF has been objecting to subsidy systems that benefit the rich as well. The other solution is to introduce a petrol card system to motorcycle users under their registration and NICs.
Demand management has to be introduced to curtail consumption. It has been argued that higher prices would curtail demand. This has not, however, happened appreciably. In the recent period, petroleum demand has been on the rise despite heavy price increase. There are two or three reasons; firstly, there are some sectors and segments which are not influenced by price at all; secondly, the poor group is already at a mere subsistence consumption level and; thirdly, economic and population growth causes some increase as well.
Rationing is one of the effective tools of demand management. In older times, there used to be Ration Shops for food items such as flour and sugar which worked rather well in non-compute times. Rationing is not liked. But it would have to be resorted to forcibly by the circumstances which may be anarchic. A well planned rationing system may be prepared at least for implementation when needed. Public sector and large private companies may be advised to introduce fuel control programmes having some targets. 10-20% saving may be possible in this respect.
This problem and the proposal should not be dubbed away as `a temporary one. Poverty and non-affordability of the energy items would remain an enduring problem, as we have seen in the case of gas and electricity.
There are other mid-term solutions such as introduction of Bio-CNG which is a cheaper fuel, especially, for public transport system; cleaner and cheaper. In Sindh province, there is a scheme which is running at a slow space. A fast track Bio-CNG scheme may be introduced in all provinces. It may be noted that petroleum prices in Pakistan are lower than in other developing countries which prompts the IMF to pressurize the government to increase petroleum prices. GoP would, however, itself be ultimately constrained to increase the petroleum prices under financial constraints. Even Sri Lanka has higher prices than in Pakistan. In India, petroleum price are about 80% higher. In Bangladesh, 29% higher gasoline prices, although the differences in HSD prices are lesser, a constant feature in Bangladesh policy of lower HSD prices. In Vietnam, the Philippines and Thailand, petroleum prices are similarly higher by 60-70%. However, the specific circumstance of Pakistan of recent high currency devaluation should be considered in this respect arguing for a mid-way compromise approach which may have to be worked out diligently.
Let us hope that Russia-Ukraine war ends sooner and the energy and other commodity markets come back to normal. Even common people in rich countries are feeling difficulty in paying their energy bills. Poor and developing countries would not be able to sustain so expensive energy for long. IMF and other IFIs will have to think over some form of a voluntary commodity price stabilisation fund for developing countries, in collaboration with oil producers, if the phenomenon lasts for longer.
(The writer is former Member Energy Planning and author of several books on the energy sector)
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Oil Sales and Subsidy-2020-
21
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M.S. HSD others Total
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Sales-Metric tons 7454021 6633236
MT to Liter 1389 1176
Sales Liters-millions 10353.63517 7800.685536
Sales Price 166.95 208.16
Subsidy-Rs/L 29.6 73.04
Total Subsidy-Mn Rs/yr 306468 569762 876230
Tot. Subsidy/m avg-Mn RS 25539 47480 73019
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Source: OGRA,PSO,OCAC
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Comparative Oil Prices in selected countries-1st May 2022
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Gasoline Diesel
Prices USD/L Prices USD/L
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Pakistan 0.802 0.771
India 1.476 1.314
SriLanka 1.097 0.85
Bangladesh 1.033 0.928
Vietnam 1.243 1.1114
Philipines 1.37 1.378
Thailand 1.366 0.877
China 1.359 1.217
Turkey 1.293 1.497
Spain 1.942 1.973
Italy 1.888 1.899
USA 1.193 1.342
Pakistan Rs/L 149.86 144.15
Pakistan Exchange Rate Rs/USD 185.7
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Source: Global Petroleum Prices
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MOTOR GASOLINE H.S.D
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Retail Retail
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Ex-refinery 166.95 208.16
PDC -29.60 -73.04
IFEM 3.93 1.14
141.28 136.26
OMC margin 3.68 3.68
Dealer margin 4.90 4.13
Petroleum Levy 0.00 0.00
Price before Sales tax 149.86 144.07
Sales Tax - % 0.00% 0.00%
Sales tax 0.00 0.00
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Max. ex-depot sale price 149.86 144.07
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Ex-Refinery Price Build Up
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MS HSD
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FOB (S'BBL) 122.05 149.71
Premium (S'BBL) 8.02 11.17
C&F ($/Bbl) 130.07 160.87
Ex.Rate 185.95 185.95
C&F (RsLit) 152.13 188.15
Incidentals (Rs'Lit) 0.22 0.30
Custom duty (RsLit) 14.61 18.05
Adjustment (Rs'Lit) 0.00 1.65
PDC (RsLit)
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Ex.Refinery Price (Rs/Lit 166.95 208.16
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Copyright Business Recorder, 2022
The writer is former Member Energy, Planning Commission and author of several books on the energy sector
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