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Pricing mechanism

September 11, 2012

PRICING reform in the oil and gas sector has received a boost lately. The days since the end of Ramazan have seen two important initiatives which were long overdue. One is the new petroleum policy, which provides incentives to the private sector to enhance output of gas from existing fields and to expand the search for new gas finds. The second is the reform of petroleum pricing, a measure that was passed in the days just prior to Eid, and has been implemented subsequently. As a result of the latter reform, prices of fuels like petrol and diesel are no longer set by the government as they used to be. Rather, the oil marketing companies set the price and announce it to the government and consumers. Moreover, where the government used to set the price every two weeks, now the OMCs will announce a new price every week, depending on the direction in which oil prices have moved in the international market.

Two things need to be said about this reform of petroleum pricing. First are the contradictory statements given by the petroleum minister when the reform measure was still under consideration. It was disappointing to see the minister sit before the relevant standing committees in the legislature and oppose the reform. All three standing committees that held hearings on the reform measure opposed it and instead argued for capping oil prices at levels obtaining on July 21. It was puzzling to see the minister add his voice to this populist consensus, and agree to carry this recommendation to the prime minister with his support. It was equally perplexing to see him go public with the bizarre proposal to cap oil prices for Eid, as a “gift to the people”. This step cost the government more than Rs1bn in subsidy payments until it was rescinded days after Eid, at the insistence of the finance minister. It is to the prime minister’s credit that he ignored the populist advice that was proffered with the support of the petroleum minister, and that he opted for the saner advice of the finance ministry instead.

Equally mystifying was the minister’s presence at the meeting of the Economic Coordination Committee where this measure was agreed upon, with the proposal for deregulating prices in his hands. How can one support deregulation at one forum, and back price caps at another? Secondly, there is also an important need to stabilise prices at the pump by absorbing the adjustment in prices in the petroleum development levy instead of passing fluctuations through to the pumps.