The Institute for Policy Reforms has said that the petrol crisis was a serious governance failure due to strained liquidity position of PSO which severely restricted the ability to import. In a Fact Sheet issued here on Sunday, the IPR warned that there is another shortage waiting to happen. The total import of furnace oil has fallen sharply.
Since PSO has a share of 91% in the import of furnace oil, its constrained ability to import has had a greater impact on the overall availability of furnace oil. Consequently, the likelihood of even more power load shedding is much higher today.
IPR said that petrol crisis is the consequence of deep structural problems in the energy sector which have spilled over to the shortage of petrol. This has been compounded by serious problems of co-ordination among the multitude of ministries and agencies performing different functions within the sector.
This was followed by the depletion of inventories, closure of CNG stations in Punjab and rise in demand due to the fall in price. Also, it is not surprising that the crisis first manifested itself in the largest Province due to the additional factor of closure of CNG stations.
The major importer of petroleum products is the state-owned Pakistan State Oil (PSO). It imports 66% of petrol while 34% being imported by other oil marketing companies (OMCs).
PSO has serious liquidity problems because of non-payment for purchases of furnace oil largely by the GENCOs, HUBCO and KAPCO. By September 2014, the receivables of PSO had risen to the colossal figure of Rs 222 billion. In December, a number of L/Cs of PSO have been dishonoured. This has greatly restricted PSO's ability to import all petroleum products. In effect, a large part of the circular debt has been parked in PSO.
There has been some depletion of inventories of petrol with OMCs. These companies have carried inventories to below the level of three weeks in order to minimise potential inventory losses of up-to Rs 7 billion at a time of falling prices.
The decline in supply of petrol has occurred at a time of a big increase in demand due to a number of factors. By the beginning of January, with the cumulative fall in price of 28%, demand increased in the range of 6% to 8%.
Also the Government announced the closure of CNG stations from Mid-November for four months in Punjab. This has led to diversion of demand towards petrol. A first estimate is that the consequential increase in demand nationally for petrol is over 10%. Overall, the combined effect on demand of the fall in price and reduction in supply of CNG is 16%.
Therefore, with declining supply in the presence of a big increase in demand, it was inevitable that, sooner or later, a shortage would take place. The crisis could only have been prevented if the Government had anticipated and taken measures early to import more petrol, prevent a depletion of stocks and manage demand better.
IPR's assessment is that the highest contribution to the petrol crisis was the strained liquidity position of PSO which severely restricted the ability to import. This is followed in importance by the depletion of inventories, closure of CNG stations in Punjab and rise in demand due to the fall in price. Also, it is not surprising that the crisis first manifested itself in the largest Province due to the additional factor of closure of CNG stations.
IPR opined that besides ensuring accountability for the debacle of different ministries and agencies, there is need for co-ordinated and urgent action on the part of the government on a number of fronts.
First, there has to be an immediate injection of funds into PSO by the Ministry of Finance of up to Rs 100 billion.
Second, the problem of mounting circular debt has to be tackled much more vigorously by the Ministry of Water and Power to ensure that PSO does not find itself in the same crippled position once again.
Third, OGRA may consider raising the required level of stocks with OMCs to at least one month's cover and develop an adequate monitoring mechanism with penalties. Prices of petroleum products should be deregulated fully.
The role of the Competition Commission of Pakistan must be to prevent the emergence of any cartels. Finally, the Ministry of Petroleum and Natural Resources must develop the capacity to forecast and monitor supply and demand better and play a more aggressive management role within the petroleum sector, it recommended.