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Ogra, PC oppose deregulation of diesel prices

Updated July 12, 2017

ISLAMABAD: Amid opposition from the Planning Commission and the regulator, the Ministry of Petroleum is seeking deregulation of high speed diesel (HSD) prices, with petrol to follow at a later stage, to encourage oil marketing companies (OMCs) and dealers to invest in additional storage capacity.

In a summary moved to the Economic Coordination Committee (ECC) of the Cabinet, the petroleum ministry has proposed an outright 33 paisa per litre increase in dealer commission and OMC margin on petrol at the rate of 19 paisa and 14 paisa per litre, respectively, with effect from July 1.

The ministry has argued that dealers and OMCs margin on HSD should also be increased by 16 and 14 paisa per litre, respectively, in case the government did not want to go ahead with deregulation of diesel price at this stage.

The regulator says such a move would limit govt’s ability to absorb or pass on the impact of international price fluctuation

On the other hand, the Planning Commission and the Oil and Gas Regulatory Authority (Ogra) have opposed the argument that deregulation of diesel prices would lead to increased investment and creation of additional storage capacity. The two organisations argued that same argument was used in 2000 for deregulation of oil sector involving healthy incentives of “deemed duty” was misused for billions of rupees of additional profitability instead of increasing storage capacity.

The development comes at a time the government, regulators and oil industry have come under criticism for operating poor quality of transportation and retail oil network following a series of accidents, particularly the tragic loss of more than 215 lives in Ahmed­pur East on June 25 this year.

The petroleum ministry said the dealer commissions and OMCs margins on two major products — petrol and HSD — are regularly being revised annually on the basis of consumer price index since 2014 under a decision of the ECC.

On the same principle, the OMC margin on petrol should be increased from Rs2.41 to Rs2.55 per litre and for dealers it should be hiked from Rs3.16 to Rs3.35 per litre, the petroleum ministry said.

The ministry further added that oil companies were demanding a higher increase of 18 paisa per litre instead of 14 paisa.

In case of HSD, the petroleum ministry proposed that “instead of revising (margins for dealers and OMCs) on CPI basis, it should be deregulated under the government policy of liberalisation and deregulation in a phased manner to encourage and support investment which may lead to increase in the oil storage capacity in the country by enhancing days cover.”

The petroleum ministry conceded that “the price of HSD would vary from pump to pump across the country” due to deregulation of margins on HSD but it was “expected that people would prefer to buy from the filling stations offering cheaper and efficient product.”

“Moreover the deregulation would create an atmosphere of competition, the prices would be determined as per market forces based on demand and supply position. It would circumvent the pressure of dealers to increase their margin for meeting their cost of business and to set margins under market forces,” the ministry claimed without quoting any past success story including the recent deregulation of CNG rates.

It argued that deregulation would be subject the OMCs to enhance the level of commercial stock/storage from existing 20 days to 30 days of their sale within three years and to maintain online inventory at the oil depots and then dealers to also maintain online inventory within one year, and made accessible to Ogra for monitoring.

The planning commission supported increase in margins on diesel and petrol on the basis of CPI but opposed deregulation of HSD without first formulating a “clear cut Downstream Oil Policy” covering all aspects of refinery, petroleum product logistics, storages, marketing and distribution including deregulation of various products.”

It said any change in policy without proper ground work could be counterproductive.

The Ogra has also opposed the deregulation saying the “OMCs already prefer sharing their margins with dealers rather than passing its benefit to consumers.” It noted that this would also limit the government’s ability to absorb or pass on the impact of international price fluctuation.

Published in Dawn, July 12th, 2017