Decrease in oil prices

Published October 17, 2023

THE latest 12.3pc and 4.7pc decrease in the retail prices of petrol and diesel for the second half of this month must mitigate the pain of the inflation-stricken low- to middle-income people at the pump. But it is unlikely to significantly reduce rapid inflation, or bring down the elevated cost of living, even if it helps to somewhat decelerate the current pace of price increases. The government has twice cut fuel prices since the beginning of the month to pass on the benefit of falling global crude rates and appreciating home currency to consumers. A look at the last two weekly Sensitive Price Index readings, however, shows that the previous reduction in fuel rates for the first fortnight of October did not prevent even short-term inflation from surging. This underlines the fact that manufacturers, producers, transporters and service providers in countries such as Pakistan do not respond immediately to downward adjustments in fuel prices for the public — although they are ready to quickly incorporate the impact of increased petrol and diesel costs in their prices to protect their own profits.

However, price rigidity stems primarily from the uncertain outlook of the global oil market and the exchange rate. The existing mechanism of determining retail fuel prices twice a month also adds to the uncertainty as domestically, upward and downward adjustments can be significant, and it isn’t feasible for manufacturers, producers and service providers to adjust their prices with each change in petrol and diesel rates. Many argue that the complete deregulation of retail fuel prices would help bring greater market stability and slow down price inflation to some extent. Fuel prices and the exchange rate are indeed two major contributors to inflation in Pakistan. Inflation can largely be kept under control if these factors remain stable. Nonetheless, there are several other aspects, ranging from low industrial and agricultural productivity and high taxation on basic goods and services used by the majority of those in the low-middle-income bracket to flat economic growth and the failure of price control mechanisms that create room for traders to fleece their customers, contributing to rapid increase in inflation and price rigidity. Without tackling these factors, only the naive will expect two uncertain variables — global oil prices and the exchange rate — to help tame inflation and reduce the cost of living.

Published in Dawn, October 17th, 2023

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