ISLAMABAD: In a major policy decision towards broader deregulation, the government reduced on Sunday prices of all transport fuels by up to 5.5 per cent for a week to pass on the impact of falling international prices to consumers.

The highest reduction of Rs6 (5.5 per cent) was made in the price of petrol — from Rs108.45 per litre to Rs102.45.

In line with a government decision to keep the price of compressed natural gas (CNG) at 40 per cent less than that of petrol, the CNG rate was reduced by Rs5.49 (5.53 per cent) to Rs93.79 per kg from Rs99.28 for Zone-I comprising Balochistan, Khyber Pakhtunkhwa and Potohar, and by Rs5.02 to Rs85.68 per kg from Rs90.70 for Zone-II comprising Sindh and Punjab.

Prices of all other petroleum products were reduced only nominally -- price of high speed diesel (HSD) mainly consumed by heavy vehicles, electricity generators and agricultural tubewells has been reduced only by 14 paisa to Rs113.16 per litre from Rs113.30 and that of light diesel by 95 paisa to Rs96.22 per litre from Rs97.17.

The price of kerosene has been reduced by 40 paisa to Rs101.23 per litre from Rs101.63.

POLICY DECISION: But the most important change was a decision by the government to do away with inland freight equalisation margin (IFEM) for high octane blending component (HOBC) which was used as a tool to maintain a uniform rate across the country.

This is the first step towards a separate pricing regime for petroleum products for different cities under which it will be impossible for consumers to have a uniform rate.

“The government plans to test market response by abolishing the IFEM on HOBC to subsequently apply the same mechanism for other products,” an official said.

With that in mind, the government allowed oil marketing companies to fix separate prices of HOBC in different cities on the basis of actual transportation cost. As a result, HOBC price for Karachi has been reduced nominally by 36 paisa (0.27 per cent) to Rs131.54 per litre from Rs131.90 because the product is transported from Parco refinery in Multan.

Its price for Lahore and Multan, the closest cities from the Parco refinery, will be Rs129.54 per litre, a reduction of Rs2.36 or 1.8 per cent.

Likewise, consumers in Rawalpindi and Islamabad will also be at an advantage because Attock Oil Refinery is located in Rawalpindi. The HOBC price in the twin cities will come down by Rs1.50 (1.13 per cent) to Rs130.40 per litre from Rs131.90.

The price in other cities could not be ascertained because these would be separately conveyed to retailers by oil marketing companies.

THE CATCH: The separate price mechanism would make it difficult for the media to report rates for every city, an official said.

That is in line with the pricing structure adopted in the US and some European countries where consumers do not even notice a price change taking place on a daily basis.

But this is against the policy notes of the Oil and Gas Regulatory Authority which seeks price changes on a biannual basis for longer market predictability and stability because it will allow the regulator to monitor price trends in the international market and its translation into the domestic market for transparency of accounts.

“In such a case, it is the oil marketing companies and oil refineries which will have to suffer because of cash flow problems,” said a petroleum ministry official who conceded that keeping an eye on major market forces would be difficult for the regulator.