Petroleum prices have been increased once again. New prices are: petrol Rs209.86 and High Speed Diesel (HSD) Rs204.15/L. It is a 40 percent increase in one month done in two steps of Rs 30 per liter each. Amid heavy load-shedding, power regulator Nepra has increased average electricity prices by Rs7.90 per unit although different consumer classes may have varying effect.

Gas companies have asked for a 40 percent increase, which may be announced also. Earlier, there used to be capacity crisis, now there is a fuel crisis. All kinds of problems have been accumulated; hot summers, water shortage that reduces hydro and rising international fuel and commodity prices.

The subsidy of Rs 25 billion per month would still be there as opposed to Rs 120-130 billion before the increase. Full cost has not been passed on to consumers.

There is still subsidy of Rs 9.0 per litre on gasoline and of Rs 23.0 on HSD. Would another price increase be insisted by the International Monetary Fund (IMF)? International prices have increased unreasonably.

The IMF should demand the local elimination of local deviations. It would be impossible to revert back to Rs 30.0 per litre Petroleum Levy and 17.5 percent GST. It may create political chaos and anarchy which is likely to spread in many developing countries.

It would have been impossible not to increase energy prices irrespective of political or socio-economic consequences. Energy prices have increased by 200-300 percent worldwide; imported coal international price is 375 USD/ton instead of the usual 80-100 USD/t; Brent crude oil is 122USD/barrel; diesel price is disproportionally higher than that of Brent crude oil; LNG prices, too, have increased beyond.

Pakistan’s oil pricing system was working fine. With reasonable and affordable prices, GoP was able to even earn revenues as well. Oil prices in Pakistan, generally, used to be lower as compared to those in South Asian countries.

India has recently reduced oil prices by reducing excise duty. Petrol price in New Delhi is IRs 96.72 per litre (PkRs. 246.64) and diesel’s price is IRs.89.62 (Pk.Rs.228.53). Even then, the increased prices in Pakistan are lower than those in India. In other cities, petroleum prices are even higher. In Pakistan the pain is higher due to general high inflation and the abrupt increase of 40 percent.

Politics and oil price

No political government would want to increase prices and lose votes, especially, when elections are being talked about for sooner or later. Unfortunately, political discourse in Pakistan does not promote realistic perceptions.

The current government criticized the outgoing government for high energy prices while the outgoing government is criticizing the present one.

The fact is that none of the two governments could have helped the situation. There have been talks about consensus on a charter of economy. People in the advanced and rich countries, too, are extremely concerned at high energy prices.

Even if the IMF would have allowed the subsidies, the budgetary resources would not have allowed it without compromising such important items as defence expenditure.

There is circular debt of power sector exceeding 2.5 trillion mark and there is a topping on it of Rs 1 billion circular debt of LNG, and more on oil as full oil price is still not being charged to the consumers.

Cost reduction possibilities

We have recommended elsewhere, that there is a scope for cost reduction in efficient buying. Currently, large margins are being paid over international prices which increase imported oil prices. Local refineries’ pricing also include these high margins. Ways and means should be searched for improving buying efficiency. Combined and bulk buying and G2G agreements could help in this respect.

Oil refineries are witnessing a windfall profit situation worldwide. Our local refineries should also be benefiting from this rising trend, as their prices are tied to international pricing. Can we ask or request them to share the burden by lowering their margins? It is a difficult issue. Refineries have suffered losses earlier as well. However, profit margins are extraordinary. Margins can be curtailed or brought forward under arrangement with GoP.

Our local crude oil price is equal to international price, although there is a windfall provision which reportedly is not being implemented. An option is that it could be activated. Crude oil pricing may be revised a la local gas pricing providing for floor and ceiling prices, which protects both consumer and producer. There are many options which have small cost and price reduction potential but put together these may total up to a good amount.

Russian oil controversy and potential

What are the options of matching the price rise challenge? Imports of cheaper oil from Russia? There is controversy around it. Russia is the world’s third largest petroleum producer and also the world’s largest petroleum exporter. Russia exports 5 million bpd of crude oil, 3.32 million bpd of diesel and one million bpd of other petroleum products.

India has bought 62.5 million barrels of Russian crude oil since February. The forecast for June is 1.05 million bpd. Reportedly, the import prices are 30-40 USD per barrel lower than the benchmark Brent crude’s prices. Indian private sector importers and refiners have earned a profit of USD 30 per barrel. Public sector refiners have been losing money as they did not import the Russian crude.

The price gap is so wide that it is worth for India to take the risk of annoying the US and the EU. However, the share of imports from Russia may not be very large. India imported 1.577 billion barrels of crude oil in 2021-22 out of which 62.5 million barrels came from Russia which should be less than 5% of their demand. This would, however, increase as much as to 23% as imports continue. It is highly uncertain that the US and the EU would allow this level of imports from Russia.

As far as Pakistan is concerned, we require all the three products: crude, diesel and gasoline. Total petroleum demand is of the order of 17-20 million tons out of which some 50% is produced by local refineries which require crude oil. Crude oil imports are around 8.2 million tons per year (MTPA) and petroleum products’ imports total at around 10 million tons; out of which gasoline accounts for 5.5 MTPA and diesel 2.8 MTPA.

Thus unlike India which only imports crude oil, Pakistan imports all the three items: crude, gasoline and diesel. There is a controversy regarding cheaper oil import possibilities from Russia. The IMF deal, FATF and sanctions risk are there apart from other political risks. There are people who contest that Russian crude would not be processable by local oil refineries.

However, majority opinion by credible experts is that Russian Crude can be used. Crude oil, however, is imported from the friendly Middles Eastern countries at various known and unknown credit and concessionary terms. The major issue is supply of diesel, which Russia can easily help resolve.

It depends on politics, economics is really clearly beneficial. Russian or Iranian oil may be available via China. China has a long-term supply agreement with Iran at concessional prices of25%.Diplomatic channels and negotiations may enable Pakistan to save some money in importing diesel from Russia.

Oil refineries are designed on a particular range of specifications to be able to produce with maximum yield, energy efficiency and least cost. Certain crude oil may be feasible to run technically on a particular refinery but may not be economical. It is no use to buy cheaper crude oil but produce at low efficiency.

An optimum maxima of profitability is required. It appears that Russian oil is closer to specs with the Saudi crude oil that is usually procured in Pakistan. Some oil refineries have done analysis of the Russian crude and have found it feasible. There are others who are dealing in generalities only.

(To be continued)

==================================================              Local and imported petroleum              products-2019-20 (million Tons)==================================================              Imports     Production   Consumption--------------------------------------------------Gasoline         5.54        1.97             7.51Diesel           2.84        3.79             6.63Furnace oil      0.15        2.22             2.37Jet Fuel         0.14        0.56              0.7Kerosene         0.01        0.08             0.09Others            1.9        0.83             2.73Total           10.58        9.45            20.03Share-%         52.82       47.18              100Crude Oil        8.22        2.28             10.5==================================================Source: OGRA=======================================================================================================                Selected Crude Oil Comparison=====================================================                       API      Sulfur         Source-----------------------------------------------------Arab Extra Light        40        1.09   Saudi ArabiaArab Light              33        1.77   Saudi ArabiaArab Medium             31        2.55   Saudi ArabiaBakken                42.1        0.18            USABasra Light             30        2.92           IraqBasra Heavy           23.6         4.2           IraqBrent                 37.9        0.45            U.KDubai                   31        2.04            UAEIran Heavy            30.7         1.8           IranIran Light            33.7         1.5           IranKuwait                  31        2.52         KuwaitSakhalain Blend       44.7        0.16         RussiaSiberian Light        34.8        0.57         RussiaSokol                 35.6        0.27         RussiaUrals                 30.6        1.48         Russia=====================================================Source: Mckinsey Energy Insight=========================================================================================================================Comparative Oil Prices in selected countries-1st May-1st June 2022====================================================================                                    Gasoline              Diesel                               May Ist    June 2    May Ist   June 2                                  2022      2022       2022     2022--------------------------------------------------------------------Pakistan                         0.802     1.062      0.771    1.033India                            1.476     1.344      1.314    1.205Sri-Lanka                        1.097     1.233       0.85    1.096Bangladesh                       1.033     1.001      0.928    0.899Vietnam                          1.243     1.389     1.1114     1.15Philippines                       1.37     1.531      1.378    1.434Thailand                         1.366     1.541      0.877    0.966China                            1.359     1.452      1.217    1.308Turkey                           1.293     1.533      1.497    1.496Spain                            1.942     2.147      1.973    2.012Italy                            1.888     2.055      1.899    1.972USA                              1.193     1.265      1.342    1.463Pakistan Rs/L                   149.86    209.86     144.15   204.15Pakistan Exchange Rate Rs/USD    185.7     197.6====================================================================Source: Global Petroleum Prices====================================================================

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