Import of Petroleum Products
Since Pakistan does not have any oil wells, it imports crude oil from oil-producing countries. This trade is characterised by the price of crude oil, called Brent crude, in the international market and Pakistan’s fluctuating exchange rate. In March 2020, as countries across the world implemented lockdowns and other containment measures to control the spread of coronavirus, mobility and public transportation became restricted.
This led to an unprecedented drop in global demand for oil and the price of Brent crude fell as low as $18.38 per barrel in April 2020. The International Energy Agency (IEA) estimated in April that consumption was down 30% as compared to last year’s. Faced with a massive oversupply of crude oil, producers scurried for storage facilities, with stocks reaching an all-time high in June 2020.
This caused the producers to gradually phase out oil production by almost one-fourth of their capacity. As countries began to ease lockdowns and vaccinate their populations, life began to normalize, increasing the demand for oil and causing the prices to rise yet again. Over the last year, the price of Brent crude has increased by 46.4% reaching $111.93 per barrel in the international market in July 2022.
This increase in prices is in due part because of the Russo-Ukraine conflict that has excessively strained global oil supplies as sanctions on Russia coupled with the reluctance of the Organisation of the Petroleum Exporting Countries (OPEC) to increase its oil production has condensed output levels. The international oil market has the greatest influence on the final price of petrol in Pakistan.
With the depreciation of the rupee beginning in early 2018, the cost of a barrel of crude oil for Pakistan began to increase dramatically, even if the price remained relatively stable in USD terms. To illustrate, a barrel of crude oil priced at USD 67 in January 2018 cost PKR 7,400, whereas the same USD price in May 2021 cost PKR 10,205.
The fluctuating exchange rate and the record depreciation of the rupee against the US dollar have resulted in skyrocketing the price of petrol, among other imported goods.
Government Regulated Price
The prices paid by the end consumers of petroleum products are an accumulation of various components, each of which represents a portion of the overall oil value chain. From the exploration and production of crude oil to the refining and distribution of petroleum products, the cost of fuel accounts for each sector of the industry. In all countries except those rich in oil, governments impose fuel taxes to raise revenue to either meet fiscal targets or as an instrument to drive their energy policy.
The pricing framework for petroleum products varies across countries worldwide. The government may regulate the prices by providing subsidies or imposing price ceilings or letting the price be determined by an unregulated, liberal market. In the otherwise market-oriented economy of Pakistan, the price of petrol is regulated by the government, and the end-user price is fixed as notified through OGRA, the Oil and Gas Regulatory Authority.
This is an essential tool for the government to not only raise revenue but also stabilize prices, ensure redistribution, and achieve social objectives. Earlier, the petroleum prices in Pakistan used to undergo revision every month until the PTI-led government reduced the period to a fortnight. In a bid to revive the stalled $6 billion bailout package from the IMF, the current government will henceforth revise the petroleum prices every week, fulfilling another one of the preconditions for the bailout of the IMF deal.
Components of Petrol Prices in Pakistan
The end-consumer price of petrol in Pakistan is primarily determined by OGRA and based on the following six components.
Local refineries import crude oil from oil-producing countries and sell their product to oil marketing companies at a price calculated by OGRA called the ex-refinery price. Petrol prices are revised using the Import Parity Price calculator. Essentially, the product’s base price is determined by the monthly average of its international price as published in Platt’s Oilgram coupled with the foreign exchange rate. As per OGRA’s notification dated August 16, the ex-refinery price was set at Rs. 197.39 per litre.
Inland Freight Equalization Margin (IFEM)
OGRA uses the IFEM mechanism to ensure a uniform petrol price across the whole country despite the disparity in transportation cost of petroleum products to different depots. Without IFEM, the price of petrol would vary significantly across cities. As per the notification issued on August 16th, IFEM is calculated at Rs. 5.84 for motor gasoline.
Oil Marketing Company (OMC) Margin
OGRA defines the profit margin per litre for companies that distribute oil. In the notification issued on August 16, the OMC margin was set at Rs. 3.68 per litre.
This component represents the commission received per litre of petrol sold by the owners of the petrol pump stations. As per the notification issued on August 16, the dealer margin increased to Rs.7 on the motor spirit.
Petroleum Development Levy (PDL)
To raise revenue for the government, the federal government imposes a petroleum development levy on petroleum products. The levy on these products will gradually be increased by Rs.50, as agreed on by Pakistan to revive its loan package from IMF.
GST is levied as a predetermined percentage on the total of all the above-mentioned components. The Ex-Depot Sale Price is the ultimate cost after sales tax is applied. A GST amounting to Rs. 33.62 per litre is included in the maximum ex-depot sale price of Rs. 233.91 per litre.
Provision of Subsidies and its Impact
Following record-low prices in the international market in 2020 and 2021 as countries dealt with the coronavirus pandemic, an earlier-than-expected recovery of developed economies from the adverse economic impacts of Covid-19 was seen. As a result, global demands for Brent crude surged in October 2021, causing the OPEC basket price to double.
In March 2022, prices of petroleum products surged unprecedentedly as compared to last year because of Western sanctions on Russia owing to its military aggression in Ukraine. The sharpest increase in energy costs in nearly 50 years sent shockwaves across commodity markets for the first time since 1973.
Since Pakistan is a price-taker for crude oil that is necessary to meet 30% of its energy needs and generate tax revenue through petrol consumption, the country then only has room to adjust the rates when international prices begin to rise. The PTI government came up with an energy relief package.
On February 28, 2022, it eliminated the general sales tax (GST) and the petrol development levy (PDL) imposed on petrol, reducing the price by Rs.10 per litre in Pakistan, and announced to amend the prices by June 30, 2022. The relief package was planned to be funded through increased revenue collection, as evidenced by the FBR’s record tax collection of Rs. 4858 billion in the first 10 months of the fiscal year 2021-22.
The FBR collected Rs. 239 billion more than its target for the period. It is worth noting that the GST on petrol had previously been the single largest source of FBR collection, accounting for 35% of overall GST collection in 2021. The subsidy did, in fact, reduce fuel inflation and provide relief to its consumers.
However, it also resulted in a significant current account deficit (CAD) because the levels of fuel import and consumption in Pakistan remained unaffected by the worldwide price hike. However, removing this subsidy was one of the International Monetary Fund’s primary demands. With Pakistan pressing harder for the revival of its bailout programme, the subsidy was steadily reduced.
With oil prices nearing $120 per barrel in July, Pakistan’s foreign exchange reserves depleting, and the government desperate to generate revenue, the government passed the cost on to consumers as it increased the price of petrol. The PMLN-led government increased the price by Rs. 60 per litre within a week at the beginning of June 2022 to minimize the subsidy and fulfil IMF’s condition for bailout negotiations.
This massive surge has followed a further increase in the prices of petrol which has had a devastating impact on inflation, imports and exports, and the current account deficit of Pakistan. In the most recent development, according to the notification issued by the Finance Division, the petrol prices have risen by another Rs. 2.07 per litre reaching Rs. 235.98 per litre despite a gradual decrease in the Brent crude price, with effect from September 1, 2022.
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