The rise in oil prices

In Pakistan, oil prices increased further to Rs 248.74 per liter for petrol and Rs 276.54 for diesel. It is the fourth time that oil prices have been raised in 1 to 1.5 months under the directives or under pressure from the IMF.

Subsidies have been almost entirely eliminated, although there may be residual subsidies that need to be adjusted. The IMF agreement requires full price recovery plus PLD taxation of 30-50 rupees per liter and 17% GST. That means more is yet to come.

While the elimination of subsidies may be a rational and reasonable demand of the IMF, demanding the PLD and GST in such an abrupt manner when international oil prices are extremely high, is rather ruthless and shows a high degree of insensitivity towards the poor of this country. While in US dollars the prices in Pakistan might not be that high, in local rupees the current prices are over 100% of regular prices and have risen quite sharply. The wages of the poor, however, have not increased at all and cannot increase under difficult economic circumstances.

The IMF can very well claim that it was Pakistan that brought its economy to a level that it had to approach the IMF. And this is not the first time that Pakistan has approached the IMF. This is the 16th or 17th time an IMF loan has been requested in the past 30 years or so. Successive governments in Pakistan have pursued an elite agenda, collecting no taxes and providing subsidies that have benefited the rich and powerful. The question that the IMF must ask itself: why is all this the fault of the poor? The poor in Pakistan should have resisted and revolted.

The fact is that Pakistan has no choice. It must accept IMF terms or be prepared to default. Default may not be a good idea, although some nihilistic but respectable economists have argued for default over meeting IMF conditions.

Let’s go back to the question of the price of oil. One way to answer the question of price growth is to look at prices in comparable countries or in the region. In India, current average/typical gasoline prices are Rs 277 Pak per litre. Indian prices have always been higher than those in Pakistan, for which there is no apparent reason other than higher taxation in India. Otherwise, India’s oil industry is much larger and more efficient than Pakistan’s. India exports oil and is very competitive, although not much is known about India; financing military spending and cross-subsidizing exports could be some of the possible reasons. It should be noted that India gets 30% cheaper crude oil from Russia. However, it cannot exceed 10% of their current needs. It is on the rise but day by day.

The lowest oil prices in the region are found in Bangladesh. The government of Bangladesh began to indicate that the subsidies were becoming unsustainable. Some increase in the price of oil is expected there. In most countries, diesel prices have been kept lower than gasoline prices simply on the basis of public use of diesel in passenger and freight traffic. In Pakistan, for one reason or another, this logic was not accepted. However, the current high diesel prices in Pakistan are due to high diesel prices. We need to postpone this discussion to a later date when prices stabilize. It can be noted that in Sri Lanka, despite the widely known economic conditions and default, diesel prices are still lower than Pakistan and elsewhere except Bangladesh. Bangladesh and Sri Lanka have kept diesel prices relatively low. Export competitiveness seems to be the main driver of their energy pricing policies.

In the United States, oil prices have been lower than elsewhere in advanced countries due to a highly competitive oil industry and abundant local oil production. Benchmark US crude oil prices have historically been lower than elsewhere. US retail prices for petroleum products have always been considered benchmark prices. This time, diesel prices are 10% higher than gasoline prices in the United States. This is due to higher diesel market prices resulting from demand, supply and other issues. Usually, diesel and gasoline prices are almost the same in the United States as in Europe and other advanced countries.

In such a grim scenario, there are very few options and prospects for good. However, it is possible that the price of oil will drop. It may take about a year to stabilize around $90-95 as indicated by future contracts. The Rupee could strengthen as happened recently amid the good news of the IMF deal finalization process. The Rupee may improve if all other financial sources follow the IMF funding. The government may be able to pass the savings on to consumers or use them to make up other shortfalls and subsidies.

There are also opportunities for cost reduction, however small: efficient purchasing, reduction of demurrage and other losses, negotiation of fair margins by oil refineries and E&P companies. An unfortunate aspect of Pakistan’s local crude oil pricing formula is that wellhead prices are paid at international prices. There is no price advantage. While foreign oilmen rush us, locals do the same, even when it comes to state-owned companies. Likewise, oil refineries make hay while the sun is shining. There is an S-curve cap and a flour pricing formula in case of local gas. Why is it not so for oil? This would protect both the producer and the consumer. Reportedly, there is a windfall profit formula that apparently has not been activated. Every penny is important in the energy sector, as it is consumed in millions and billions of units; whether barrels, cubic feet, kWh or MMBtu.

Finally, how to protect the poor from these exorbitant prices? We have been offering a low cost brand of gasoline for smaller and older motorcycles and vehicles for some time. It is a low RON gasoline. In addition to being cheaper, it provides direct and targeted subsidies to the needy. The IMF supports targeted subsidies but opposes unintended benefits for high-income groups. The government of Pakistan has not yet been able to make a decision on this. Instead, he announced an allowance of Rs2000. This has not yet been implemented or is not visible. This was announced at the same time as the first raise of Rs30. It is necessary to increase this quantity appropriately.

Energy-saving measures have been announced that could reduce consumption, although this does not directly affect prices. However, the reduction in consumption would reduce imports, reduce the current account deficit and affect the exchange rate positively. Reduced exchange rates would also reduce retail oil prices. The rise in prices itself can reduce demand. On a lighter side, all poisons have antidotes.

Email: [email protected]

The author is a former member of the Energy Planning Commission.

About Christopher Easley

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