There are two recent and important developments that are worth discussion. Firstly, petrol prices were increased on 1st July once again — the 4th rise in the last 35 days — by a margin of 5-6%. Subsequently on Tuesday (5th July), Brent Crude oil prices drastically went down from 113.50 USD to below 103 USD/bbl. We will first discuss the international crude oil prices sliding down issue and then the local price rises.
Oil brokerage firm Citi projects that Brent crude oil prices could fall to 65USD per barrel by year (2022) end and USD 45 by year (2023) end. The scenario assumes no intervention by OPEC. OPEC supply reduction may alter the forecast. Another assumption being that Russian crude oil exports remain robust. Fears of recession are affecting demand, which is going down. Inventories may go up causing downslide of prices. Earlier, future price of 95 USD was quoted by other agencies. This would indeed be good news for poor countries, including Pakistan, and even richer importing countries.
New gasoline price is 248.74Rs/L (6.35% increase) and High Speed Diesel (HSD) is Rs 276.54/L (5.0245% increase). On gasoline, Petroleum Levy of Rs 10 has been applied and on HSD of Rs 5. An agreement with the IMF requires full price recovery plus PLD taxation of up to Rs 50 per litre (in steps of Rs 5-10 per month) and GST of 17%. This means more has yet to come.
While elimination of subsidies may be a rational and reasonable IMF requirement, demanding PLD and GST in such an abrupt manner when international oil prices are extremely high is rather ruthless. In Pakistan, there are two reasons behind growing concerns among people on the petroleum pricing issue: rising international prices and heavy currency depreciation. While in USD terms, prices may not be so high, in local rupee terms, however, current prices are more than 100% of the usual prices and have increased rather abruptly. Wages of the poor have not increased at all and cannot increase in tight economic circumstances.
Let us see how much more the petroleum prices can rise. One way of answering the price growth issue is to look at what are the prices in comparable countries or in the region. In India, the current average/typical gasoline prices are at 1.317 USD/L (8% higher than Pakistan’s 1.219 USD/L), which are the highest in the region.
Gasoline prices in India were 18% higher than in Pakistan only three weeks ago. The current increase in Pakistan has narrowed down the difference to 8% only. However, diesel prices in Pakistan are now 14.7% higher than in India. In the past, prices in India always higher than in Pakistan, for which there is no apparent reason except higher taxation in India. There used to be political controversy in India as to why petroleum prices were lower in Pakistan.
In India, as late as April 2022, the share of taxation in gasoline prices was 43.65% and a year earlier it was 63.22%. In the case of diesel, the share of taxation in April was 38.04% and a year earlier it was 56.77%. The current price comparison between India and Pakistan is rather perplexing. There may be buying inefficiency issue in Pakistan. It should be noted that India will continue to buy ‘cheap oil’ from Russia. However, it may not be more than 10% of its current requirement.
In the region, Bangladesh has the lowest petroleum prices. In most countries, prices of diesel have been kept lower on the simple premise of public use of Diesel in passenger transport and goods traffic. In Pakistan, for one reason or the other, this logic has not been accepted. However, the current high diesel prices in Pakistan are due to high diesel prices. We have to put off this discussion for a later date when prices stabilise.
In the US, petroleum prices have been lower than elsewhere among the advanced countries due to a highly competitive oil industry and local abundance of oil production. WTI, American benchmark crude oil prices have always been lower than elsewhere. The gasoline and diesel prices in the US are 1.371 USD/L and 1.511 USD/L, respectively.
The US retail prices of petroleum products have always been considered as benchmark prices. This time, diesel prices in the US are 10% higher than those of gasoline. It is due to higher market prices of diesel due to demand and supply and other issues. Usually, diesel and gasoline prices in the US used to be almost the same while in Europe diesel prices are kept lower for economic and social reasons.
In the current bleak scenario, when all energy and commodity prices have increased many times, there may be very little options and prospects for something good to happen in the near future. However, there is a possibility that oil price may go down. Prices had crossed 120 USD. And late went down from 116 USD to 108 USD and went up to 112 USD; still a 4 USD decrease. Rupee may get strengthened as has happened recently. Rupee may improve if all other financial sources follow the IMF funding. GoP may be able to pass on the savings to consumers or use these to meet its other deficits and subsidies.
There are some cost reduction opportunities as well, however small these may be: efficient buying, reduction of demurrage and other losses, negotiating fair margins by the oil refineries and E&P companies. An unfortunate aspect of Pakistan’s local crude oil pricing formula is that the wellhead prices are paid at international rates. There is no price advantage. As foreign oil producers are squeezing us, the local ones are doing the same.
Similarly, oil refineries are making hay while the sun shines. There is an S-curve ceiling and floor pricing formula in case of local gas. Why it is not the same for oil. It would protect both, producer and the consumer. Reportedly, there is a Windfall Profit Levy (WPL) formula, which apparently has not been activated. India has introduced or activated Windfall profit provision recently (293.80 USD/tonne, i.e., 39.38 USD/bbl). There are exclusions, however. Small crude producers are exempted from (WPL). Also, extra production from the last year is also exempt from WPL.
The latter being a clever provision for encouraging increased production. This kind of incentive may also be tried by Pakistan policymakers for both oil and gas. Every penny is important in energy business as it is consumed in millions and billions of units; be it barrels, cubic feet, kWh or mmbtu. Another question: can WPL be diverted to oil pricing formula and help reduce oil prices for the poor? Will IMF accept it? Would WPL proceeds be significant enough?
Finally, how to protect the poor and low income group from such excruciating prices. We have been proposing for quite a while a low price gasoline brand for motorcycles and smaller and older vehicles used by the low income group. This is a low –RON gasoline. Apart from being cheaper, it provides a vehicle to channelize the direct and targeted subsidies for the needy.
The IMF supports targeted subsidies but opposes unintended benefit for the high income group. GoP has not been yet able to decide about it. Instead, it has announced a stipend of Rs 2000. It has not yet been implemented or is not visible. This was announced simultaneously with the increase of the first Rs 30 increase. There is a need to suitably enhance this amount.
Energy conservation measures have been announced which may reduce consumption, although it does not directly affect prices. However, a reduction in consumption would reduce imports, would reduce current account deficit and would affect the exchange rate in a positive manner. Reduced exchange rates would also reduce retail oil prices. Price raise itself may reduce demand. On a lighter side, all poisons have antidotes.
==========================================================Comparative Oil Prices in selected countries-1st July 2022========================================================== Gasoline Diesel========================================================== June 27 th 2022----------------------------------------------------------Pakistan 1.219 1.356India 1.317 1.182SriLanka 1.528 1.278Bangladesh 0.953 0.856Vietnam 1.44 1.303Philipines 1.565 1.624Thailand 1.517 0.993China 1.45 1.307Turkey 1.643 1.654Spain 2.216 2.188Italy 2.184 2.148USA 1.371 1.511Pakistan Rs/L 248.74 276.54Pakistan Exchange Rate Rs/USD 204 204% increase Pakistan 6.349 5.0245==========================================================Source: Global Petroleum Prices, Shell=================================================================================================================India Petroleum Price Structure-IRs/L-22 May 2022======================================================= Gasoline Diesel=======================================================Crude Oil Price -Average-IRs/L 50 50OMC Processing Cost 7.35 8.15Central Excise Duty+Road Tax 19.9 15.8Petrol Pump Commission 3.8 2.6 VAT (Delhi) 15.67 13.07VAT (Mumbai) 30 20Retail Price _Mumbai 111.35 97.28=======================================================Source:https://www.mycarhelpline.com/index.php?option=com_latestnews&view=detail&n_id=417&Itemid=10=======================================================Copyright Business Recorder, 2022