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Pricing mechanism


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PRICING reform in the oil and gas sector has received a boost lately. The days since the end of Ramazan have seen two important initiatives which were long overdue. One is the new petroleum policy, which provides incentives to the private sector to enhance output of gas from existing fields and to expand the search for new gas finds. The second is the reform of petroleum pricing, a measure that was passed in the days just prior to Eid, and has been implemented subsequently. As a result of the latter reform, prices of fuels like petrol and diesel are no longer set by the government as they used to be. Rather, the oil marketing companies set the price and announce it to the government and consumers. Moreover, where the government used to set the price every two weeks, now the OMCs will announce a new price every week, depending on the direction in which oil prices have moved in the international market.

Two things need to be said about this reform of petroleum pricing. First are the contradictory statements given by the petroleum minister when the reform measure was still under consideration. It was disappointing to see the minister sit before the relevant standing committees in the legislature and oppose the reform. All three standing committees that held hearings on the reform measure opposed it and instead argued for capping oil prices at levels obtaining on July 21. It was puzzling to see the minister add his voice to this populist consensus, and agree to carry this recommendation to the prime minister with his support. It was equally perplexing to see him go public with the bizarre proposal to cap oil prices for Eid, as a “gift to the people”. This step cost the government more than Rs1bn in subsidy payments until it was rescinded days after Eid, at the insistence of the finance minister. It is to the prime minister’s credit that he ignored the populist advice that was proffered with the support of the petroleum minister, and that he opted for the saner advice of the finance ministry instead.

Equally mystifying was the minister’s presence at the meeting of the Economic Coordination Committee where this measure was agreed upon, with the proposal for deregulating prices in his hands. How can one support deregulation at one forum, and back price caps at another? Secondly, there is also an important need to stabilise prices at the pump by absorbing the adjustment in prices in the petroleum development levy instead of passing fluctuations through to the pumps.

Comments (7) Closed

MQ Sep 12, 2012 01:22am
Petrol is no longer a rich man's fuel. Over 60% consumption is by two wheelers (Motor bikes).Petrol is not a refined form of Diesel. Prices rise when crude oil becomes expensive.
Salim Sep 11, 2012 07:43am
Most of the miniters don't understand the technicalities of their own portfolio so no surprise at this minister.
malik Sep 11, 2012 03:58am
A very disappointing analysis. People are already paying the highest price for these commodities.
ChangaManga Sep 11, 2012 04:51am
Government should get out of the business of price setting. For the most part, let the demand and supply define the price in different parts of the country. For example, government does not set the price of gold; because of this gold is alway available in Pakistan. Government does set price for onions at time, and onions do disappear at times.
msa Sep 11, 2012 11:58am
It is hard for me to understand why diesel prices are higher than petrol. Where petrol is refined form of diesel and utilized only by luxury items afforded by the elite of society. Where as diesel is being used for collective means such as mass transportation, industry and has direct effect on the masses already suffering from price hikes and inflation.
M. Asghar Sep 11, 2012 08:09am
As the Editorial points out, unless there is a continuous objective assessment of the cost of petrol and its other products, the ministerial whims either due to the ignorance of the situation or just lack of sense of resposabilty, the things cannot but go on in this muddled and harmful ways.
Taaruf Sep 11, 2012 08:14am
This has become a routine in Pakistan to flactuate oil prices on their own by OMC. Government need not to pay any heeds toward this flactuation in oil prices. Rightly said by above comments holder that most of the ministers do not know which portfolio they are charged in. This government has become a totlly failure.