So it begins

The petroleum supply – especially in the north—is no long at normal levels for the past week or so, even though there are no immediate signs of shortage of petroleum products (petrol and high-speed diesel) in the short term. The country has stocks of 18 days of petrol consumption:30 days in the case of diesel. And some more supply is in the pipeline. However, farmers are complaining about shortage of diesel in rural Punjab while commuters are complaining of rationing in supply of petrol at petrol stations.

This is happening as suppliers are expecting a significant jump in prices before 15th February. Oil Marketing Companies, agencies, dealers (petrol pump owners), consumers and others are hoarding petroleum products as much as they can as they expect Rs30-50 jump in prices per liter and want to have capital gains.

The only way for the government to undo this is to increase all the duties and taxes at once, and then announce that there would no further increase in petroleum levy, GST or any other tax on petroleum products going forward. Otherwise, this shortage will remain a norm till all the taxes are passed on.

Having said that, the threat of prolonged shortages is as real as it gets. The country is very much at the brink of an economic default. Without the IMF, it is a painful reality. And even with the IMF, normalization of supply would take some time. The country must run near zero current account balance for the next 2-3 years. There is likely to be a case of debt restructuring, and while during its negotiation which might take 6-18 months, nothing would be back to normal. Petroleum products supply will remain low.

Hence, it is recommended that we should all economize our consumption by ourselves. Otherwise, it would be imposed on all. Many would be compelled to do so, as inflation is taxing consumption and increase in the petroleum prices will have its toll on consumption – nothing is inelastic. Others are better off to adjust their lifestyle voluntarily.

The ground reality today is that the country has around 18 days of stock of petrol (approximately 600 mn liters) and 30 days of diesel (around 700 million liters). And new imports are subject to LCs opening. And that is subject to dollar inflows. None of these are going to be at normal levels anytime soon. Thus, imports must remain less. And for that consumption of petroleum must be rationed.

However, not all the petroleum products are being imported. Approximately, 30 percent of petrol and 70 percent of diesel supply usually comes from local refineries. And for that supply, locally produced crude is good for 20 percent of refineries production. Then is a case of deferred oil facility – 1t is at $100 million per month, at current prices, it would supply another 20 percent crude need for domestic refineries.

Thus, if things head south i.e., an economic default, refineries will be able to operate at 40 percent capacity. This would ensure supply of 12-15 percent of petrol and 28-30 percent of diesel at today’s consumption. This would mean extreme rationing with the black market to operate in full swing. Its surely going to be an ugly situation.

However, this might not happen. There would be some supply from the import of crude for refineries and petroleum products for direct supply to OMCs to ensure better position – but nowhere close to normal.

And in immediate term, the supply of diesel has to be ensured, as high consumption season of diesel is coming. The wheat sowing season starts in March and the demand of diesel jumps for that need. And in case of shortage that could lead to a lesser supply of wheat in coming months and quarters. And in case of shortages of petroleum, overall supply chain of food and other products is to be compromised and that could result in shortages of multiple goods across the country.

The government should take this seriously and not let the shortage grow today and should increase the price promptly to manage immediate supply and to lower the demand. However, in any case, brace for a tough summer.