In 2000 the government of Pakistan decided to introduce a mono grade petrol which was called 87 RON as part of a policy initiative for overall oil sector deregulation.

Research Octane Number (RON) is an indicator of easy burning of fuel in motor cars, the higher the number, the lower the chances of engine knocking. In other words, the higher the RON, better the quality, engine performance and environment protection.

Pakistan has been using 87 RON motor spirit for the past 20 years, while the world has moved on to higher RON petrol. In view of sharp reduction in oil prices, the government decided in June last year to switch over to 92 RON premier motor gasoline (PMG) from October 2016.

The government also decided that the OMC margin on 95 or 97 RON will not be fixed for dealers and that OMCs and companies are free to charge whatever they deem fit

The government and the industry claimed to have introduced 92 RON, commonly known as Euro-II gasoline, effectively in November-December 2016 with some initial logistical delays. Some oil industry players wanted to allow the sale of three different qualities, 87, 92 and 95 RON (as was the case in India), with price differential for an interim period so that various consumer groups had a choice based on purchasing power.

This was not acceptable to the petroleum ministry which believed it would lead to co-mingling and adulteration in the market without giving the consumer surety of whether they were getting 87 RON for the price of 92 RON. The government officials have confirmed at various parliamentary forums that some smaller players were already mixing jet fuel (Rs4 per litre) with petrol (Rs74 per litre) or benzene or kerosene with petrol because of taxation and price differential (almost Rs30 per litre).

Another type of petrol which is known as 97 RON or High Octane Blending Component (HOBC) was also available but the demand and consequently, production, was very low at 3,500-4,000 tonnes per month. This product was mainly used by high end cars and was more expensive than 87 RON.

As things worked out late last year, the Ministry of Petroleum introduced three different grades of petrol, after clearance by the Economic Coordination Committee (ECC). The 87 RON was abandoned and instead a new grade 92 RON ‘officially’ replaced it. The HOBC of 97 RON was not changed but another grade 95 RON was introduced.

Practically, a product of almost the same quality as 90 RON is being sold in the market in the name of 92 RON even though the two products should have a price difference of at least Rs1.5 per litre. This is partly because, perhaps, some local refineries are incapable of producing 92 RON.

What is normally being done in the market with the government’s approval is selling a product after co-mingling or blending, at best a lower grade product (generally 87 RON), with an imported better grade (95 RON) to arrive at the ‘official’ 92RON which is actually 90 RON petrol. Interestingly, the two products (87 and 95 RON) have different density and viscosity qualities and can hardly be made a standard product through simple co-mingling or even blending without the refining process.

Secondly, like diesel the petrol prices are uniform throughout the country which means that any person buying petrol in a remote area of KP, Balochistan or Gilgit pays the same price as a consumer buying it in the big cities like Karachi and Lahore.

This is controlled through Inland Freight Equalisation Margin (IFEM). The total cost of transportation of petrol is divided with the number of litres sold and this amount paid by the consumer as a part of pricing varies every month. The IFEM is controlled by the Oil and Gas Regulatory Authority (OGRA).

The margin of both diesel and petrol is fixed for Oil Marketing Companies (OMCs) and no one can charge more that Rs2.35 per litre (The current margin for OMCs). Similarly the margin for a petrol station owner or dealer is also fixed.

What the Ministry of Petroleum decided is that the new grade of 95 RON will be de-regulated. That means it is not part of IFEM and the price in every city will be different. Customers in Hyderabad for example will pay approximately Rs1 per litre and consumers in Lahore will pay Rs4-5 more than the consumer in Karachi.

The government also decided that OMC margin on 95 or 97 RON will not be fixed for dealers and that OMCs and companies are free to charge whatever they deem fit. The government or the Ogra did not even put an upper ceiling on dealers or OMC margins.

The result is that consumers are being robbed in the name of superior quality. For example during the month of March 2017, the price of 92 RON Petrol was about than Rs73 litre inclusive of all duties, taxes, IFEM and dealer and OMC margin but the price of 95 RON was over Rs80 per litre by PSO while Shell was charging over Rs90 per litre.

This means that Shell and PSO were charging a margin (both OMC and dealers) of 23pc and 12pc respectively instead of the 7pc allowed on regular petrol of 92 RON. Amazingly the quality did not improve greatly by increasing RON from 92 to 95 and the difference in cost of purchase of these two products is less than Rs2 per litre.

It seems that companies are charging exorbitant prices to consumers for 95 and 97 RON and the regulator and the ministry concerned have absolved themselves of their role in the name of deregulation, allowing consumers to be fleeced by these companies. Practically, there is no one to take notice and protect consumer interest.

Shell Pakistan is selling roughly over 3m litres of 95 RON every month and PSO over 6m litres. This means their monthly profit from this product alone runs into a couple of billions of rupees per month without any commitment for investment. Lubricants already stand completely deregulated and revenues arising out of their sales are not even accounted for against regulatory levies.

The ministry of petroleum and the regulator appear to have a limited skill set to handle such issues while large players take advantage of the flaws in the system put in deliberately for their benefit.

The Ministry of Petroleum must put an upper ceiling on the margins charged by OMCs on both 95 and 97 RON petrol like Liquefied Petroleum Gas and Compressed Natural Gas until a few weeks ago.

Published in Dawn, Business & Finance weekly, April 24th, 2017