ISLAMABAD: Taking benefit of historically low prices, the Ministry of Petroleum and Natural Resources is seeking an increase in the profit margins on petroleum products of oil marketing companies (OMCs) and dealers.
A senior petroleum ministry official confirmed that a summary had been moved early this week for the Economic Coordination Committee (ECC) of the cabinet and the consultation process with stakeholders — the Planning Commission, the Federal Board of Revenue and the finance ministry — was currently in progress.
He said the revision in margins for OMCs and dealers’ commission was overdue since December last year on the basis of a previous decision of the ECC but given the fact that oil prices were going down many within the government believed the margins should also decline proportionately.
The petroleum ministry, on the other hand, believed the low oil price scenario was the best time to improve private sector’s profitability for investments in quality improvement and capacity up-gradation. Therefore, it is seeking complete deregulation of the oil sector to limit government’s role to policymaking and allowing OMCs and dealers to set pricing and ensure quality control.
He said the ECC approved in November 2014 higher dealers’ commission and OMCs margin in absolute terms but at about 3-4 per cent of import parity price. These margins in percentage terms have automatically gone beyond 8pc due to fall in international prices, he said.
OMCs have reported to the government that their margins were set at Rs2.35 per litre on both petrol and high speed diesel in November 2014 and its revision had been linked with the Consumer Price Index after one year. Therefore, the government should honour its commitment to “to increase the OMC margins on both petrol and HSD” as clearly stipulated in the ECC decision that these be revised with CPI margins on an annual basis.
Moreover, OMCs have also asked the government to increase margins more than CPI to also account for infrastructure investments. They said the lower margins were one of the reasons behind product shortages over the past one year as some companies violated mandatory storage quotas to avoid inventory losses amid sliding prices.
Privately, officials agreed that there was no justification for increase in margins in view of reduced international oil prices and resultant import parity price, lower electricity costs and inflation rate of less than 4pc and argued that some companies were offering discounts on oil products to gain the market share.
On the other hand, a study conducted by the Pakistan Institute of Development Economics on the orders of the ECC had proposed up to 30pc increase in the margins of dealers and oil companies about two years ago when the prices of major oil products were more than Rs100 per litre.
The institute had, however, opposed price deregulation saying the Pakistani market was not fit for competition and any such move could lead to increased monopoly by a few because of bigger size of older companies.
Published in Dawn, March 4th, 2016