The petrol fiasco

Updated 25 Jun 2020

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The writer is a member of staff.
The writer is a member of staff.

ONCE again we are discovering the hard way how fragile our oil supply chain really is. Across Punjab and KP at least, on-and-off shortages of vital fuels like petrol and diesel keep breaking out at the pumps, and industry executives are saying this situation is likely to persist till July. In the meantime, they are urging critical price reforms that the government has finally lent a serious ear to.

Also read: Officials begin to take notice as petrol shortage worsens

Here is what’s going on. The petrol (and wherever I say this I mean to include diesel as well) supply chain in the country runs primarily on imported product. The price at which the fuels will be sold is totally regulated by the government, end to end, except for hi-octane fuel which is used primarily in high-end imported cars. That fuel is deregulated, meaning the companies are free to set whatever price they want for it.

The government decides how much the fuel will sell for at the pump, as well as how much the refineries will sell it for to local companies. For its part, the government has to get involved in the pricing of fuel because there are very few players in the market. Less than a dozen OMCs and less than half a dozen refineries operate in Pakistan. Left to their own devices, these companies can (and most likely will) easily collude with each other to set prices and fleece consumers, so the sector cries out for deep government involvement until such time as the regulatory authorities can be trusted to prevent collusive behaviour.

The flip side of this intervention is that having taken on the responsibility to set prices, conduct regular ‘product review meetings’ (held periodically between government and industry to ascertain the supply and demand position of all vital fuels in the country), the government also picks up the responsibility to ensure the smooth supply of product in the market.

A number of things have gone wrong this time. But at the heart of them is an attempt by the government to impose an unrealistic price at a critical time.

But in ensuring that the supply chain continues to function smoothly, the government has to perform a little bit of a high-wire act. It has to dictate the terms under which the oil industry will operate, but in doing so, it has to balance out the public interest with the vested interest of the oil companies. The oil companies want high profits, consumers want cheap fuel, the government wants its taxes, and we all want the pipeline to keep flowing. Keeping this enterprise running is not rocket science, but it does require some brains. Erring on one side or the other can cause the smooth supply of product to break down, which serves nobody’s interest, or the price to rise too far that burdens consumers and fuels inflation.

A number of things have gone wrong this time. But at the heart of them is an attempt by the government to impose an unrealistic price at a critical time when international prices were climbing. April saw some of the greatest volatility in oil markets, as prices tumbled amid lockdowns and domestic demand all but dried up. Arranging new shipments amid this uncertainty was a tricky job.

On May 20, for example, one of the largest OMCs in the country wrote a letter to the government warning them that June will see fuel shortages. “Given the volatility in the prices of Crude Oil and Products as well as in freight” the letter read, “it seems that we will have a severe shortage of Motor Gasoline in June, which will add to the current situation in Diesel, for the following reasons….” The reasons given were simple: as per the prevailing price formula, both refineries and OMCs will incur steep losses for sales in June, and the cargoes planned by PSO will be unable to meet the June demand.

Whose job was it to receive, listen to, and act upon this warning? One would think it would be the energy minister. Mr Omar Ayub has a track record of dropping the ball in such important matters. A year before this letter, back in May of 2019 for example, he was waving his fist and talking tough at what he called “mafias” in the power sector that were colluding in power losses, and that he vowed to bring down. He also vowed to reduce the circular debt to zero by December 2020, and repeated the vow to the prime minister as well. He boasted how 30,000 FIRs had been registered in his muscular recovery drive and 4,000 arrests had been made. The circular debt was close to Rs450 billion at the time.

Today, the circular debt is touching Rs2 trillion, meaning it has quadrupled, and the government is introducing special legislation in parliament to allow them to tack on additional surcharges to consumers’ bills to recover the money that Mr Ayub vowed with his fist he would recover from the “thieves and the defaulters” last year. In a nutshell, he failed and we have to pay for it.

So what does the government do? They move him over to the petroleum side instead, where he has now given us a fuel shortage, and is once again waving his fist in the air and blaming the “oil mafia” for the situation and is getting FIRs registered against oil company executives, the very people the government needs to work with in order to get the supply chain moving again.

The net result is that once again he has had to be moved out of the way. He may be the minister, but the negotiations with the industry are being conducted by three special assistants of the prime minister instead. They are discussing pricing reform, and chances are pretty high the net outcome will be the same as the proposals made in the letter of May 20. Eventually, the bluster will give way to pragmatism. The FIRs will be emptied out, the sound and fury will wither away, and Mr Omar Ayub will be left on his perch, in search of a new mission for himself.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, June 25th, 2020