Petrol prices in Pakistan: what are the components, and how have they behaved

With petroleum levy again becoming a topic of discussion, Business Recorder looks at how petrol prices have behaved in the past one year, and how movement has come in tandem with international oil prices.

However, it is important to note that, like in the case of several other commodities, Pakistan is a price-taker when it comes to oil. It meets almost 30% of its energy needs through imports, and also relies heavily on petrol consumption for its tax revenue. The country then only has room to adjust the rates when international prices begin to rise.

Between June 2021 to February 2022, minor changes were made to tax rates. This is when the OPEC basket price remained below $100. There was no subsidy element (also known as price differential claim).

However, it was the start of March when the government started to subsidise the price of petrol as it looked to take on the impact of rising fuel prices.

However, removal of this very subsidy was one of the most important demands of the International Monetary Fund (IMF). With Pakistan knocking on the door harder for revival of its bailout programme, the subsidy was gradually rolled back.

With oil prices currently hovering close to the $120-a-barrel mark, and Pakistan facing low foreign exchange reserves and looking to increase revenue, the government passed on the impact to consumers.

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Now, with the government increasing its upper-cap for petroleum levy from Rs30 to Rs50, one could imagine that the rates of petrol would now have an additional component from July.

Price increases and components

In three separate petrol price revisions, the government of Pakistan phased out the subsidy. Before diving into the details, it is important to understand the fuel price components in Pakistan.

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The first element is the base price or ex-refinery price per litre of petrol. It is equivalent to the actual cost of importing finished petroleum products. The ex-refinery price is highly volatile due to sharp oscillation in the global crude price. Second is the retailer and freight cost. It includes the inland freight equalisation, margins of oil marketing companies and commission of dealers.

Next comes taxes which comprise of sales tax and petroleum levy. Finally, the last component is price differential claim which is the subsidy on one litre of petrol.

The consumer’s price of petrol is determined by adding ex-refinery price, retailer and freight cost and taxes. In case the government decides to cap the price at some level, the difference between consumer price and the price fixed by the leadership is covered by the subsidy.

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The petrol price in Pakistan is revised on fortnightly basis, meaning that the Oil and Gas Regulatory Authority (OGRA) sends a summary to the prime minister in the mid and end of each month.

In reaction to the summary sent by Ogra on February 28, 2022, then-prime minister Imran Khan reduced the price of petrol by Rs10 and stated that the price would remain at Rs149.86 per litre till the new fiscal year which will begin on July 1,2022. In other words, he gave a subsidy to absorb the petrol price above Rs149.86 per litre.

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After assuming office, the PML-N government also kept petrol prices unchanged at Rs149.86 for 1.5 months. However, on May 27, the government slashed the subsidy by Rs30, from Rs47.02 to Rs17.02, and increased the consumer price of petrol to Rs179.86. This partially eliminated the subsidy.

Due to spike in global oil price and depreciation of rupee against the US dollar, the ex-refinery price of petrol rose from Rs184.37 per litre on May 27 to Rs206.42 per litre on June 1. This meant that the amount of subsidy given on one litre of petrol rose from Rs17.02 to Rs39.32 per litre.

Govt announces increase in petrol price by Rs30

The government once again hiked the price of petrol by Rs30 on June 3 and cut the subsidy to Rs 9.32 per litre. This made the petrol price breach the Rs200-per-litre mark and took it to Rs209.86 per litre.

Govt announces another Rs30 increase in petrol price

Even at this point, the government was bearing Rs9.32 per litre cost as subsidy. By June 16, the ex-refinery price of petrol had risen to Rs220.72 per litre due to rupee devaluation and global oil price fluctuation, At this point, the government was still giving Rs24.03 in subsidy.

While considering the fortnightly petrol price summary on June 15, the government eliminated the subsidy and hiked the petrol price by Rs24.03 per litre to Rs233.8 per litre.

Through continuous price revisions, the government has fulfilled a key condition of the IMF for the resumption of the stalled bailout programme, widely seen as crucial to help Pakistan meets its external financing needs.