ISLAMABAD: The government has notified increase in profit margins of Oil Marketing Companies (OMCs) and dealers by up to 10pc on petrol and diesel sales effective from July 1.

In a letter to the Oil and Gas Regulatory Authority (Ogra), the Petroleum Division has conveyed a secret decision of the Economic Coordination Committee (ECC) of the Cabinet taken on May 30 that increased the margins. Ogra would be required to include in the sale prices of oil products for July based on higher margins for OMCs and their dealers.

The regulator has been told that margin for OMCs on high-speed diesel (HSD) had been jacked up by 23 paisa to Rs2.64 per litre instead of Rs2.41. Likewise, the margin for dealers on HSD was increased by 26 paisa per litre to Rs2.93 from the existing Rs2.67 per litre. As a result, the HSD would be costlier by almost half a rupee per litre only because of increase in margins.

Similarly, the Petroleum Division also notified an increase of nine paisa per litre for OMCs on petrol and 12 paisa per unit for dealers. As such, the OMC’s margin would go up to Rs2.64 per litre from Rs2.55 while dealer’s commission would rise to Rs3.47 per litre instead of Rs3.35. Therefore, the petrol price would have an additional impact of 21 paisa per litre.

The oil industry has been lobbying the government for an early decision on higher profit margins on petrol and HSD in line with a previous decision of the ECC that linked adjustments in margins to Consumer Price Index (CPI).

Last year, the ECC led by then Prime Minister Shahid Khaqan Abbasi had increased the margins for OMCs and dealers by a cumulative 30 paisa per litre on diesel and petrol and deregulated the diesel pricing.

However, while the increased margins were allowed in the sale price, the decision to deregulate pricing could not be implemented because of inability of the stakeholders, particularly the Federal Board of Revenue to put in place recovery mechanism for taxes on deregulated margins.

The Petroleum Division had reported to the ECC that the revised rates of dealer commission and OMC margin were due on July 1 every year under a previous decision of the ECC even though some stakeholders were opposed to linking increase in margins to CPI because that could at some time become an overwhelming part of the product price.

The deregulation of HSD and petrol were repeatedly opposed by the Planning Commission and Ogra, forcing former finance minister Ishaq Dar to reject deregulation as chairman of the ECC.

The situation was changed altogether after the elevation of Mr Abbasi as prime minister who as head of the reconstituted ECC approved HSD deregulation in October 2017 but could not implement the decision over the next eight months of his tenure.

The Planning Commission and Ogra had been questioning the argument that the deregulation of diesel prices will lead to increased investment and creation of additional storage capacity and said the same argument was used in 2000 for the deregulation of the oil sector involving healthy incentives of “deemed duty” to oil industry but was misused for billions of rupees of additional profitability instead of increasing storage capacity.

The Petroleum Division had conceded the price of HSD would vary from pump to pump across the country due to the deregulation of margins. It was “expected that people would prefer to buy from the filling stations offering cheaper and efficient product,” the Petroleum Division stated without explaining how consumers would know which retail outlet or OMC was selling the efficient or better product and if the outlet selling the cheaper product was actually efficient or vice versa.

Published in Dawn, June 28th, 2018