The petroleum price challenge

Published October 11, 2021
While record-high prices of petroleum products have started to pinch the common man hard, the incumbent political government is no less perturbed.
While record-high prices of petroleum products have started to pinch the common man hard, the incumbent political government is no less perturbed.

Pakistan’s oil consumption is gradually getting back to normal pre-Covid lockdown levels as economic activities regain momentum and international prices are again rising amid supply limits maintained by oil-exporting countries and other supply chain problems.

Since May, global prices of Brent have surged by almost one-third (32 per cent) to $82 per barrel although forecasts by the US Energy Information Administration average $62 per barrel in 2021 and $60 in 2022 against the International Monetary Fund’s (IMF) projections of about $60 per barrel in 2021 and slightly above $56 in 2022.

While record-high prices of petroleum products have started to pinch the common man hard, the incumbent political government is no less perturbed. At the outset of the fiscal year, the hefty Rs610 billion revenue target through petroleum levy appears in danger and hence a risk to the budget. The loss is, however, partially compensated through higher sales volumes and higher customs duty yield on products at the import stage, thanks to the oil rally. Interestingly, the government is currently under IMF pressure to go for additional taxes to fully compensate for the petroleum levy loss.

On the other hand, the oil import bill has more than doubled (up 103pc) to almost $3.1bn in July-August 2021 against $1.5bn in the comparable period last year. Petroleum products have consumed a larger chunk of over $1.54bn of foreign exchange as quantities went up by 16pc in the first two months. Crude quantities too increased by 3.2pc but its import value went up by 84pc to $820 million in two months. The value of liquefied natural gas and liquefied petroleum gas imports also surged by 138pc and 40pc, respectively.

In the same direction, overall consumption of oil products in the first three months (July-September 2021) posted about 24pc growth to 5.86m tonnes as industrial output and transportation business rebounded. Higher reliance on furnace oil for power generation after a few years of decline and a negligible price differential between petrol and CNG also played a role.

The government’s team propagated higher prices of petrol and diesel in India. What they never talked about was the per capita purchasing power parity that stood at about $4900 in Pakistan against $6500 in India

These are the highest numbers since 6.4m tonnes in the last quarter of 2018 but then it should be kept in mind that the last two years were historically bad in terms of macroeconomic performance on the back of unique stabilisation policies followed by Covid-19 restrictions. With a growth rate of about 15pc and over 25pc, petrol and diesel consumption has now rebounded to almost 800,000 tonnes and 700,000 tonnes per month, respectively.

As international prices shot up, the government had to bring down the petroleum levy to a minimal level and also had to slightly reduce general sales tax (GST) on almost all products to minimise the inflationary pressures that remained in double digits until a couple of months ago. But then it took an overdose of publicity when some special assistants to the prime minister claimed petroleum prices at the lowest level in the region and the world through the use of selective data.

For example, the government’s media campaigners repeatedly propagated prices of petrol and diesel in India in Pak-Rupee saying the prices of two products ranged Rs248 and Rs220 per litre (INR97-109 per litre), respectively against Pakistan’s Rs123 to Rs128 per litre. What they never talked about was the per capita purchasing power parity (PPP) that stood at about $4,900 in Pakistan when compared to $6,500 in India.

Interestingly, the petroleum prices in India are totally deregulated, varied in various states and changed on a daily basis. Also, GST (called value-added tax in India) is also fixed by states at different rates unlike Pakistan with a highly regulated oil sector along with a federal and uniform tax regime and partly shared with the provinces.

In Sri Lanka, the prevailing petrol and diesel prices in equivalent PKR are about Rs118 and Rs95 per litre. The per capita PPP in Sri Lanka is estimated significantly higher at $13,230. Nepal is perhaps the only exception in the region with a per capita PPP of $4,010 and its petrol and diesel in equivalent PKR currently at Rs138 and Rs161 per litre — higher than Pakistan. In Nepal’s currency, petrol and diesel prices are Rs97 and 113 per litre.

Bangladesh has a per capita PPP higher than Pakistan at $5,100 and its petrol and diesel rate at present is taka89 and 65 respectively (Rs178 and Rs130 per litre in PKR equivalent).

The government is collecting Rs22-25 per litre in the form of three major taxes — 10pc custom duty, Rs11-13 GST and Rs5-6 PL; the import parity price currently works out at Rs85-91 per litre excluding taxes

Interestingly, the petrol and diesel prices in Pakistan peaked at Rs87 and Rs65 per litre during the historically highest ever international crude price of $147.27 per barrel in July 2008. In contrast, the global crude prices stand almost half, the retail product prices now are almost double the then rates. That explains the impact of the devastation caused by the currency devaluation since then, particularly over the past four years. The government says the prices of petroleum products are being increased due to higher international market prices and losses in the exchange rate as PKR shed over 10pc value in less than four months.

It is a fact that the government has reduced tax rates when compared to last year but it is still collecting Rs22 to Rs25 per litre in three major taxes. For example, it charges 10pc custom duty on import of petrol and diesel (about Rs9 per litre on both products), Rs11 to 13 per litre GST and Rs5 to Rs6 per litre PL. The import parity price currently works out at Rs85 to Rs91 per litre excluding taxes.

The government can provide relief to the consumers and the economy by abolishing customs duty or reducing and fluctuating it on a fortnightly basis given the fact that rising volumes are driving revenues through GST and levy to the higher side.

At about Rs128 per litre, the retail petrol rate is currently highest in the country’s history and directly impacts the middle class the most as it is mostly used in private transport, small vehicles, rickshaws and two-wheelers. Likewise, diesel at about Rs123 per litre is also at the most expensive mark. High-speed diesel price is considered highly inflationary as it is mostly used in heavy transport vehicles, trains and agricultural engines like trucks, buses, tractors, tube-wells and threshers.

Published in Dawn, The Business and Finance Weekly, October 11th, 2021

Opinion

Intolerance grows
Updated 18 Oct 2021

Intolerance grows

Failure to pass the bill undermines the writ of the state, highlights its inability to guarantee citizens’ protection and freedom.
Moral panic
Updated 18 Oct 2021

Moral panic

If conflation of culture with religion is taken as true, there is mounting evidence that society has gone closer to such roots.
Challenges amid discord
18 Oct 2021

Challenges amid discord

Institutional disharmony and polarised politics are impeding efforts to address the country’s challenges.
Climate & youth
Updated 17 Oct 2021

Climate & youth

Disillusionment and anxiety are on the rise among youth as they confront the diminishing prospects of a better tomorrow.

Editorial

Financial troubles
Updated 18 Oct 2021

Financial troubles

Growing trade gap is fuelling the current account deficit and bringing the already meagre foreign exchange reserves under stress.
18 Oct 2021

Complaint portal

IN a ruling on Thursday, the Mingora bench of the Peshawar High Court held that the Prime Minister’s Performance...
18 Oct 2021

Capital’s master plan

IT is encouraging that on Thursday, the restructured commission formed by the federal cabinet to revise ...
Carnage in Kandahar
Updated 17 Oct 2021

Carnage in Kandahar

Pakistan’s anti-extremism policy is in many ways half-baked and inconsistent.
17 Oct 2021

Sanctity of contracts

PAKISTAN is facing yet another international dispute before the International Centre for Settlement of Investment...
17 Oct 2021

New sports policy

THIS week, the Pakistan Football Federation Normalisation Committee chief Haroon Malik was in Zurich to hold ...