Invisible factors distorting oil prices in Pakistan
Pakistan Times Business & Commerce Desk

KARACHI: Despite International factors playing havoc on the economic life of Commoner in Pakistan, the invisible factor of price distortion could be rightly attributed to the domestic magic wands rather than the international phenomenon.

Looking at government’s own statistics made available in the Energy Book, 2004 of Ministry of Petroleum and Natural Resources, it reveals a rise of Rs.82 billion (1.4 billion dollars) due to allowance of blatant and treacherous rise in the commissions of oil marketing companies and dealers, inland freight and distorting import duties, and sales tax.

In 1999, the OMCs margin stood mere Rupee 0.52 which got a sudden raise of 115.4 percent to 148.1 percent in 2004 to Rs.1.29 on per liter of gasoline. Likewise, commission on diesel was also raised 669.61 percent in the same period to Rs.1.57 from Re.0.20 on kerosene. This increase stands at 371.43 percent to Re.0.66 as compared to Re.0.14.

Since July 1, 2002, a new duty protection element was added to the import parity price of four products including High sped diesel, light diesel oil and Jp-4 to protect the local refineries in lieu of the guaranteed minimum rate of return.

This protection to the refineries, at the cost of the poor of the country entailed 10 percent of the import value of HSD, six percent of kerosene, six percent each of LDO and JP-4.

Oil Companies Advisory Committee (OCAC) adds the tariff protection to the import parity price for these four products in order to derive the ex-refinery price. The cost borne by the consumers of this scheme is roughly estimated at some Rs.2.7 billion or 47 million dollars per annum.

About the two-thirds of the subsidy comes from HSD, which is the second largest consumable product after furnace oil. The total subsidy greatly exceeds the Rs.1 to Rs.15 billion rupees that were provided directly by the government previously.

The present system of refinery protection has reduced transparency, as refineries are not operating on internatonal price parity at least in respect of four major products.

Economic watchdogs question rationale behind the continued subsidies to the refineries, which could have averted. It is said that the phasing out of the protection for the refineries is most likely to impact on the two refineries in Karachi i.e. Pakistan Refinery Limited and National Refinery, while the other two including Pak Arab located in Multan and Attock refinery in the up country have the transportation advantage.

Import regulatory duty on kerosene, JP4 and LDO does not go to thegovernment kitty as they are not imported at all. However, the consume has to pay these duties which are pocketed by the refineries and OMCs.

The two refineries in Karachi are old and largely amortized as no significant investment was made in these refineries in recent years. NRL has a profitable lubricants operation while the other could be converted into a storage facility to manage termination the ongoing protection.

The government agreeing the formula for the OMCs commission also offers not transparency as a World Bank report suggests. “It is difficult to compare this (Pakistani price mechanism) with average OM margins in other countries,” a report of the bank said.

These factors cumulatively cause adversely on consumers’ price as consumers were made to pay artificially lifted prices. This jack-up of price has not been due to increase in international prices.

On petrol a consumer is paying extra and unjust Rs.8.675 per lire, an additional Rs.8.813 on HSD and Rs.4.435 on kerosene.●