The Oil Companies Advisory Committee (OCAC), expected to meet on August 15, 2005, may recommend an increase in fuel prices, given the recent situation in international oil market. The prices were not changed last fortnight despite the fact that international oil prices were still higher. During the last fortnight, according to an oil expert, oil prices in world market escalated by on average 20 percent on different products.
This might force the OCAC to recommend to the government to increase domestic oil prices. The government, aiming to curb inflation and to benefit the common man, kept the prices unchanged.
Since May 2004, domestic oil prices have been revised 16 times, fortnightly. Of these, the prices have been increased 8 times whereas no change took place in the remaining 8 revisions.
Low increases in domestic prices were due to lower taxes (PDL or Petroleum Development Levy) on oil products during period from July, 2004 to June, 2005. However, by keeping prices low, compared to the international oil prices, the government during this period incurred a loss of Rs 58 billion since May 2004 due to lower PDL collection. Of this loss, Rs 17.5 billion was direct subsidy to domestic oil consumers.
The government has paid Rs 7.5 billion to the oil marketing companies and Rs 10.0 billion is still payable to them. Changes in local oil prices during FY05, all in rupees and in liters barring furnace oil, ie rupees per ton.
In view of higher international oil prices and as a reflection of government policy to subsidise local oil consumers, the government has set a target of only Rs 15.9 billion for PDL collection on oil sales from FY06 versus initial target of Rs 47.5 billion in FY05. FY05 PDL collection target was subsequently revised downward to Rs 10.9 billion.
Abdul Rasheed, oil and gas analyst at Jahangir Siddiqui Capital Markets Ltd, said that the implication of higher oil prices would be negative for the current fiscal year as well as external sector.
On the domestic front, higher POL prices would lead to inflationary pressure as oil prices, directly and indirectly, and have a significant effect on the general level of prices in the country.
While PDL tax revenue collection is likely to remain lower than historical numbers, total tax revenue collection from oil sector (inclusive of 15 percent GST) is likely to remain satisfactory as due to higher oil prices there has been significant growth in the GST collection from the sector.
Oil import may further rise in FY06, from FY05 numbers of $4.2 billion, as prices at present are nearly 30 percent higher than the average of FY05. This is likely to keep trade deficit close to $4.6 billion estimate announced by the government.
With reserves of close to $12.6 billion, high remittances and privatisation inflows, major impact is not expected on the exchange front in the near term.

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               July 1, 2004   July 1, 2005    Change
                                           (percent)
HSD                24.37           31.74       30.24
HOBC               40.87           54.33       32.93
Mogas              36.92           48.96       32.61
LDO                21.05           27.84       32.26
Kerosene           24.00           29.53       23.04
FO Rs/ton)*    13,359.06       19,484.45       45.85
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