As international crude oil prices have started to rise and calls for Brent at $100/bbl are being heard, panic must be setting in Islamabad, although it may not be apparent yet. There have been calls for gradual increase in petroleum prices in anticipation of the price increase before it gets too late. (See: “Oily slope” published on June 7, 2021). For a government with two clear stated objectives going forward, growth and controlled inflation, it becomes a catch-22 situation.

Here is an attempt at scenario analysis of petroleum retail prices at various levels of international crude oil price and Petroleum Levy (PL). Recall that the government is expected to amass Rs400 billion in lieu of PL for FY21. Short of target by 10 percent, it is still a remarkable number, given consistently low oil prices for most part of 1HFY21, that just made easier for the government to pocked PL without having to raise prices.

This is all going to change soon as PL on petrol is down to the lowest in recallable memory at Rs4.8/ltr. Given how oil prices have fared in the last week, even this cushion may well evaporate come decision time for mid-June price revision. Should the government insist on maintaining retail prices, we could well see an unprecedented “zero” rupees in lieu of PL. This surely cannot be sustained entering FY22.

All eyes will be on the PL target set in the upcoming budget next week. Forget the Rs550 billion projections made a few months back with the IMF, it would be interesting to see if the government choses to set the target even anywhere close to the actual FY21 collection. That said, the target may still be set higher to balance the picture, even if there is little to no hope of getting even close to it.

The Finance Ministry’s best hopes will rest on crude oil averaging $60/bbl in FY22, which is still higher than FY21 average – but lower than prevailing and projected rates. At $60/bbl, the government can well maintain petroleum prices at current rates and charge an average of Rs20/ltr in PL – which could fetch close to Rs400 billion for the year.

The worst-case scenario with oil averaging $100/bbl (highly unlikely) could be disastrous. That would mean petrol price at Rs134/ltr – up 24 percent from current rates – without a single penny charged as PL. And if there is a will to achieve the PL collection target – that could mean petrol priced at Rs157/ltr with PL at Rs20/ltr. That is also highly unlikely to happen.

For simplicity’s sake (and also in hope), let’s assume that oil average will balance around $70/bbl in FY22. That could still mean raising prices by 10 percent from current rates, and still hope to fetch close to Rs400 billion in FY22. Meanwhile, it would not hurt to work towards curbing smuggling of petroleum products, which could lessen the need to raise prices by as much in order to get more PL revenues.