A Review of Oil Marketing Companies (OMCS) and Petroleum Dealers’ Margins on Petroleum Products
INTRODUCTION
The pricing of petroleum products is a sensitive issue, especially in the countries such as Pakistan where petroleum products prices are regulated as well as in developing countries with low-income levels. The governments in such countries face a dilemma: on the one hand, the governments want to keep the prices at a reasonable level so that it does not put an undue burden on the users of petroleum products. On the other hand, the governments also do not want to put the downstream petroleum industry at a disadvantage since the petroleum industry is a major source of revenue for the government and brings in a major investment to the country.
In Pakistan, petroleum prices have always been at the centre of discussion. The discussion has intensified with the increase of oil prices in the international market and the depreciation of the exchange rate. Naturally, the scrutiny of margins of the OMCs and the dealers has also intensified. Previously, when oil prices were stable and when domestic petroleum product prices were kept well below the international levels, the margins were not even discussed apart from amongst the direct stakeholders.
Given the importance of the petroleum sector, there should be an objective analysis of the OMCs’ and petroleum dealers’ margins. Based on facts, and discussions with all stakeholders and experts, this review attempts an analysis of the current margins of the OMCs and petroleum dealers. The purpose of this review is to suggest a way forward for the margins of the OMCs and petroleum dealers, keeping in view past practices, international situation, and analysis based on ground realities.
BACKGROUND AND HISTORICAL OVERVIEW
Pakistan’s petroleum industry is regulated, albeit partially, in which the prices are administered by the government. In comparison, in some countries, the petroleum industry is completely deregulated where prices are left to market forces. In such an arrangement, marketing companies and retailers are allowed to earn their margins according to the market conditions and their cost and revenue structures. Hence, margins in these markets reflect reasonable profitability. Whereas the completely deregulated mechanism is mostly a hallmark of developed countries, the regulated mechanism is usually practiced in developing countries, amongst which Pakistan is one. The objective in the regulated petroleum markets is to keep the prices in check to safeguard the welfare of the consumers, among other things.
The OMCs’ and petroleum dealers’ margins are set by the government and are revised from time to time. Up till 2009, the margins were fixed in percentage terms (percentage of the selling price). Later, in 2010, the margins were changed from percentage terms to absolute (fixed margin) terms. It was done probably to mitigate the effect of increases in oil prices starting circa 2004. Before that, the combination of margins in percentage terms and a sharp increase in international oil prices meant handsome profits both for OMCs and petroleum dealers. It must be noted that when margins were allowed in percentage terms the downstream petroleum industry, especially at the retail end of the business, witnessed significant improvements in terms of increased investments, which in turn reflected in a better quality of petroleum products and better service at the retail outlets. This indicates that the petroleum industry responded to the gains they made due to higher margins compared to the present.
