Petrol has an inelastic demand especially for those of us who consume it to drive our motor bikes and cars daily. When we pay 112.68 rupees per liter for petrol at any fuel station or petrol pump, have you ever thought of how does that amount build up? After all it is not just a number pulled from the thin air by an oil marketing company (OMC) (like PSO, Hascol and Shell just to name a few) or government authority or should I say Oil & Gas Regulatory Authority (OGRA), Pakistan. Rather, it is a result of rigorous computation of seven different price components embedded in a pricing formula which although may be based on some reasonable logic, but to a great extent contains many grey areas leading to debates.
Rs 112.68 per litre that we pay for petrol is not just a number pulled from the thin air by an oil marketing company or government authority, rather is a result of rigorous computation of seven different price components.
Let us walk through the pricing structure of petrol. Below is an exhibit of price per liter of petrol and its break up.
Ex-refinery price is a monetary amount at which the refinery sells its finished inventories of petrol and diesel. It is calculated by the Oil Companies Advisory Council (OCAC) using a formula where Import Parity Price is determined after taking an average of past 30-days international prices as published in the Platt's Oilgram (a source of pricing benchmark in the physical energy markets). After taking this average, it is crunched further with allowed expenses for the refinery such as Handling, Bank & Ocean Charges, Marine Insurance, Wharfage and Surcharges as well as its factory overheads.
Oil industry, in an abstract, has been divided into 3 areas. Firstly, there is drilling which pertains to extraction of crude oil from deep underground. Crude oil may not be very useful in its raw form, but when cracked under extreme pressures in refineries, can give us a range of valuable petroleum and lubricating products. The process of cracking comes falls within the ambit of upstream. Once petrol has been produced and stored in storage tanks, it needs to be delivered to the end consumers through an efficient retail network. That is exactly where the downstream business dominates.
The refinery (e.g. PRL, NRL, Byco, etc.,) has blending plants and converting units where imported crude oil is cracked and converted into different variants of petrol (such as Super Unleaded and Hi- Octane). Now, petrol is not the only end product of a refinery, other distilled petroleum products are diesel,aviation fuel, kerosene oil, furnace oil, lubricants, greases and so on. It is the job of our Ministry of Petroleum& Natural Resources (MoP) to ensure supplies of crude oil or petrol in the country which they dependably do by relying and coming into business transactions with its amicable counterparts in Saudi Arabia and United Arab Emirates which are among the few oil producing countries of the world.
Petroleum Levy (PL) or Petroleum Development Levy (PDL) is a form of tax, imposed by the GoP, which becomes part of the pricing structure and the scope of accumulating levy permits all infrastructural development by statutory authorities taking place in the oil industry. Reference to the exhibit 1, shifts taking place in PL every month can be observed, but reasons behind these shifts cannot be traced fully. It would not be wrong to say that PL is a component found at the disposal of OGRA. By that I mean, it can be changed at its discretion and is a smart way to manipulate this pricing formula.
OGRA has established formidable industry practices whereby the OMCs are instructed to build storages or more technically known as depots situated at different areas of the country. Also, to maintain a stock of at least 20 to 23 days so as not to end up with dry petrol stations. Heavy penalties and fines are imposed otherwise.
There are approximately 29 strategic locations in Pakistan dedicated for depots such as Daulatpur and Shikarpur in Sindh, Quetta in Baluchistan, Mehmoodkot in Southern part of Punjab whereas Faisalabad, Sahiwal, Machike (Lahore) and Sihala (Rawalpindi) in Norther part of Punjab, Amangarh in KP and Juglot in far up north just to name a few. OMCs transfer petrol in bulk quantities between these depots mostly via an effective road transportation carried out by the logistics through tank lorries or trailers. There exists a pipeline network as well running from Karachi to Lahore via Mehmoodkot and Faisalabad but limited only to diesel supplies.
Inland Freight Equalization Margin (IFEM) is an equally important element of the pricing structure which allows petroleum prices to remain at par all across the country. If we shed some light on the geography and trade dynamics of Pakistan, we will come to know that all of the country's petroleum imports or supplies are concentrated in the south, more specifically at Keamari in Karachi- the port city.
However, the demand for petrol is everywhere. Ideally, if the freight costs or transportation charges from Karachi to anywhere up country were to be part of the pricing structure, then there would have been different per liter rates of petrol and a direct correlation between the freight, depending upon the distance from Karachi, and overall price would have existed. OGRA came up with a pricing mechanism charging roughly Rs 3 per liter which accumulates into what we know as the Freight Pool in the oil industry and managed by OGRA.
All road transportation costs incurred by the OMCs are paid back to them from the Freight Pool so as to nullify the freight element incorporated in the price build up followed by routine audits by OGRA in order to eradicate any chances of misuse of the Freight Pool.
Distributor Margin is the commission per liter earned by the OMC upon sales of petrol and diesel both to industrial and retail clients. This component together with ex-refinery Price, PL, IFEM and Distributor Margin adds up to ex-depot price. From retail perspective, the OMC is eligible to sell its volumes coming right out of its storage tanks spread all across the country to the nearest retailers or petrol pumps at Delivered Price. It adds up a few extra components such as Franchise Fee and Non- Fuel Retail Charges (for facilities like tuck shop, car wash, oil & tyre change) except for Dealer Commission earned on sale of every liter of petrol to the masses which is a take home for none other than the dealer or petrol pump.
Lastly, the OMC collects a fixed percentage of sales tax every month on behalf of the taxation authorities and files returns periodically. It does so by applying that fixed percentage to the Ex- Depot Price and Dealer Commission. After adding up all these equally important elements, we reach to Net Price charged per liter to the masses.
It is a fact that ex-depot price (which contributes to about 64% of net price) is somewhat dependent on the international trade of crude oil. Whereas Distributor and Dealer Margin are both fixed commissions and revenue streams for the businesses. Important it is to note that refineries, distributors (or OMCs) and dealers are the ones which have real stakes such that they are asked to construct storages and retail outlets which cost around millions and billions of rupees, but little do their returns reflect the colossal amounts of investments they pour in to the downstream oil ballgame.
Nonetheless, it may be surprising for any of us to see the GoP charging Rs 31.37 (PL + ST) straight away other than any turnover taxes as of today from the public at large. Taking away such a hefty chunk is extremely demoralizing for the businesses especially when there is almost little or no development taking place in the oil industry outlook.
There should be a balanced pricing formula backed by up some rationale favoring all stakeholders whose returns should be made in proportion to the investments drawn into the oil business. Although, it may not be wise to say that it is a flawed pricing mechanism, but it would not be wise either to say that it is perfect.
(The writer is an analyst at a private oil marketing company. The views expressed in this article are not necessarily those of the newspaper)
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Petrol/Mogas 2018 2019
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01-Jun 01-Jul 01-Aug 01-Sep 01-Oct 01-Nov 01-Dec 01-Jan 01-Feb 01-Mar 01-Apr 01-May 05-May 01-Jun 01-Jul
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Sales Tax 12.00% 17.00% 9.50% 9.50% 4.50% 4.50% 8.00% 17.00% 17.00% 17.00% 17.00% 2.00% 12.00% 13.00% 15.00%
Ex- Refinery Price 62.38 65.02 67.37 65.16 69.46 78.10 69.53 54.69 53.82 57.17 65.73 73.40 73.40 76.56 71.89
Petroleum Development Levy 10.00 10.00 9.68 9.68 9.99 6.15 9.81 14.00 14.00 12.12 8.95 14.15 14.00 13.76 15.00
Inland Freight Equalization
Margin 3.83 3.91 3.28 3.30 3.27 3.26 3.28 2.95 3.32 3.99 3.73 3.29 3.29 3.29 3.31
Distributor Margin 2.55 2.64 3.18 3.17 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64
Ex- Depot Price 78.76 81.57 83.51 81.31 85.36 90.15 85.26 74.28 73.78 75.92 81.05 93.48 93.33 96.25 92.84
Sales Tax 9.85 14.46 8.26 8.05 4.00 4.21 7.10 13.22 13.13 13.50 14.37 1.94 11.62 12.96 16.37
Product Price 88.61 96.03 91.77 89.36 89.36 94.36 92.36 87.50 86.91 89.42 95.42 95.42 104.95 109.21 109.21
Dealer Commission 3.35 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47 3.47
Net Price 91.96 99.50 95.24 92.83 92.83 97.83 95.83 90.97 90.38 92.89 98.89 98.89 108.42 112.68 112.68
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