Deregulating oil

Published September 7, 2022

THE government is seriously thinking of deregulating the pump prices of petrol and diesel in line with a previous cabinet decision. Simply put, it means that for the consumer, the cost of petrol and diesel will vary from city to city, pump to pump and brand to brand. Consumers residing closer to the port and refineries will be at an advantage and pay less than those living elsewhere, depending on the cost of transportation to the points of sale. This is in sharp contrast to the existing mechanism where Ogra determines the rates fortnightly, using the average price provided by Platts plus PSO’s premium. The cost build-up for the oil marketing companies — their margins, inland freight equalisation, dealer commission, taxes and levies, and other costs — are then added to this average, and inland freight equalisation is used by the government to provide oil at a uniform price from Karachi to Skardu. Deregulation will end the government’s and Ogra’s involvement in price setting, with market forces taking over the function just as they do in the case of HOBC, a higher-end product used as fuel for more sophisticated and expensive cars. The product is sold by the marketing companies under different brand names and at varying prices. Thus, Pakistanis aren’t unfamiliar with the deregulated oil sector.

The total liberalisation of the pump-pricing mechanism is rightly expected to boost market competition, forcing PSO to become efficient in order to reduce its import costs, and refineries to upgrade their technology so that they can improve the quality of their products to Euro V standards from the present Euro II or below. Initially, we may see a surge in pump prices but the ensuing competition will eventually bring down the rates as seen in other countries. It should also attract foreign investment to this sector. The government will still continue to have some space, albeit limited, to provide relief to the consumers by slashing taxes. Yet, fast-track deregulation is not advisable. The authorities must ensure that Ogra and the Competition Commission possess the capacity to monitor and take action in case of cartelisation by marketing companies to protect consumers and ensure that the benefits are also passed on to far-flung areas where different companies, especially PSO, virtually have a monopoly. More importantly, a mechanism would have to be adopted to ensure that imports are not stopped or oil shortages created in the country when global prices crash.

Published in Dawn, September 7th, 2022

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