The deregulation of high speed diesel (HSD) from September 1 is set to trigger intense competition among the oil marketing companies (OMCs).

In their first assignment to fix prices after the deregulation, the three main players — Pakistan State Oil (PSO), Shell Pakistan Limited (SPL) and Caltex Oil Pakistan (COP) — have increased the prices by two per cent to four per cent.

However, the Caltex later realized that it may not be able to compete at this price with the PSO and the Shell. Smelling erosion in its market share, the Caltex on September 3 had to reduce the price to Rs19.50 per litre from the earlier fixed price of Rs19.91 per litre.

In a deregulated oil regime, these changes will occur after the actual price fixation date.

These OMCs, however, tried to justify the price hike by saying that although there was substantial increase in the international oil prices and the ex-refinery price, the companies had only made a marginal increase and had passed on the balance to the benefit of the consumers. Like past practice these OMCs did not mention the rupee-dollar parity and the world oil prices during the fortnight on which they had determined the prices.

As usual, the price hike in diesel was followed by a flare-up of 1.02 per cent to 5 per cent in other oil products.

As part of the deregulation process, the federal government has authorized these OMCs to notify the maximum ex-depot sales price of diesel.

With diesel and fuel oil now liberalized — around 85 per cent of the oil market is now no more regulated. Like furnace oil and lubricants, which were deregulated in 2000 and 1993 respectively — consumers have started looking for price differences at the retail outlets of these companies. Naturally people will fill the fuel tanks of their vehicles where they get cheaper rates.

With the deregulation of diesel, the OMCs will now need to increase efficiencies through cheaper imports in order to pass on the benefit to the consumer. However, one factor which will definitely affect the price is the international oil prices which are based on a five-day average of Platts prices, besides the exchange rate. Other elements which determine prices are: the petroleum development levy (PDL), the distributor’s margin (not more than 3.5 per cent of ex-depot price), the dealer’s margin (not more than four per cent of ex-depot price), the inland freight equalization margin, 15 per cent sales tax to maintain the prices across 29 depots, and the secondary freight plus sales tax on secondary freight.

Since the last one month, the government has imposed a deemed duty (import duty) of 10 per cent on diesel to equalize the refinery prices. The OMCs used to pool the imported cargo but from September 1 there is no more price sharing between the OMCs.

The challenge now faced by the OMCs include frequent re-evaluation of stocks and inventories every fortnight in line with the prevalent international prices. All companies officials now claim that their companies are strongest and prepared to do so because of their top of the line information system.

The Shell perhaps is in stronger position with an investment of $18 million in its information systems.

With the deregulation now opening door for competitive pricing, the stage is set for other foreign investors to open new business ventures.

“The OMCs are now set to increase their promotional budgets in order to generate more volumes and increase their market share,” observes the rsearch head of the Invest Capital and Securities, Mohammad Sohail.

Better inventory management, good marketing and competitive pricing would be the key earning drivers for the concerned companies, he says.

There are also expectations that the OMCs like the PSO will benefit from this scenario, given its strong infrastructure , aggressive marketing under the new management and huge market presence. “I think time will tell who will reap the benefit of this liberalization,” Sohail says.

The PSO enjoys 60-61 per cent market share in diesel followed by the Shell with 30 per cent share and the Caltex with 9 per cent.

The first bulk import of diesel, imported by the Shell, arrived at the Karachi port after deregulation on September 1. Out of total 55,000 tons — 40,000 tons is for the Shell and 15,000 tons for the Caltex. The Shell plans to bring two vessels of diesel every month which contains 0.4 per cent sulphur as against the specific requirement of 0.5 per cent.

The total annual consumption of diesel in Pakistan is seven million tons of which 4.5 million tons is being exported per annum.

Amongst the economic and business policies announced by the government, the oil sector deregulation programme was appreciated by many. Ahead of many developing countries (including the neighbouring India), Pakistan’s economic managers focussed correctly on the liberalization of the downstream oil sector with the hope of attracting investment from abroad.

One good thing the government has done is not to allow the private importers and traders to import diesel, and this decision will help prevent local markets from the dumping of low quality diesel at cheaper rates.

It is now to be seen that how transporters see this deregulated regime and variation in diesel prices at various companies’ outlets. Previously transport mafia was determining the transport fares (up or down) keeping in view the prices announced by the OCAC which were also uniform all over the country. Now the situation is quite different as uniformity in diesel prices does not exist at all the outlets after September 1 deregulation.

There is an understanding between the transporters and the Sindh government under which whenever there would be a price difference (either increase or decrease) of Rs 2 per litre — the transporters would be bound to pass on the impact to the consumers in shape of increasing or decreasing the fares. Transporters may find difficulty in raising the issue of both decrease or increase in fares with the government owing to disparity in the rates of the OMCs.

Three months back, transporters had raised the fares by 50 paisa to one rupee on buses and mini buses/coaches, respectively. Now they are finding it difficult to press the Sindh government again on increasing the fares as the difference has now exceeded by Rs2 per litre.

Transporters say they cannot pass on the impact of diesel price hike at this moment as consumers cannot sustain more burden soon after three months. They have now adopted wait and see approach and look forward for September 15, when the OMCs would announce new diesel pricesf.