Petroleum Pricing in Pakistan
INTRODUCTION
The petroleum pricing is significant for a fuel economy like Pakistan. Where, the dependence on oil is not expected to decline in near future but increase; as the country’s infrastructure continues to rely on petroleum-based products. In Pakistan, oil is the largest source of energy consumed. In FY2019, despite the decline in oil consumption, it fulfils 32 per cent of our total energy demand.
The petroleum industry is also a major contributor to government revenues. In FY 2019, petroleum taxes contribute about 51 per cent to total tax revenues. Additionally, Pakistan is dependent on imports for 81 per cent of its oil requirements. The petroleum pricing is also a sensitive issue from a consumer’s perspective, given low per capita income in the country (US$ 1284.7).
This brief provides an overview of petroleum pricing in Pakistan.
PETROLEUM PRODUCT PRICING IN PAKISTAN
Chronology of Petroleum Pricing Deregulation
The government used to have tight control over the petroleum sector in Pakistan. All the decisions were made solely by the government and were often based on political as opposed to economic considerations. Petroleum prices were also under tight government regulation (Malik, 2007).
In 2000, the government initiated pro-market reforms in the petroleum sector to limit the role of the government for policy making only. The government also changed the guaranteed return formula of the refineries to an Import Parity Price (IPP) formula. Prior to these reforms, refineries were working under a fixed return formula where the return was capped in the range of 10 to 40 per cent of their equity. Thus, the government was liable to meet any loss in the profitability of the refineries (Ansari, 2004).
In 2001, the government authorised the Oil Companies Advisory Committee (OCAC) to review, fix and announce the prices of petroleum products on fortnightly basis in accordance with the approved pricing formula, as a part of deregulation policy. Therefore, between July 1, 2001, and April 1, 2006, OCAC reviewed and announced the ex-depot prices of motor spirit (gasoline), kerosene, and light diesel oil fortnightly in accordance with the approved formula.
In 2002, the Oil and Gas Regulatory Authority (OGRA) was established to perform pricing and regulatory responsibilities as an independent agency. Later in 2006, the function of price fixation was transferred to OGRA.
| Government of Pakistan (GOP) delegated the powers to OGRA to fix petroleum prices via Cabinet’s decision No. 41/03/2006 as per Government’s prescribed formula, under Section 6(2)(r) (relating to powers and functions of OGRA) and Section 21(2)(b) (regarding policy guidelines) of Oil and Gas Regulatory Authority Ordinance, 2002 (OGRA, 2019).
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In 2011, the GOP further deregulated the prices of petroleum products of Motor Gasoline (MS), High Octane Blending Component (HOBC), Light Diesel Oil (LDO), JP1, JP4 and JP8. As a result, refineries and OMCs fix and announce the ex-refinery prices and ex-depot prices of the same. Later in September 2012, the GOP deregulated ex-refinery price of High-Speed Diesel (HSD); whereas ex-depot price of HSD has already been deregulated since September 2001.
Government Approved Fuel Pricing
Price Build-up formula consists of:
(i) Ex-refinery import parity price/PSO weighted average cost of purchases
(ii) Federal Excise duty _ as per FBR rates
(iii) Inland Freight Equalisation Margin (IFEM)
(iv) Distribution Margin
(v) Dealer’s Margin
(vi) Petroleum Levy or surcharge (fixed and notified by Ministry of Energy, Petroleum Division)
(vii)Sales tax (fixed and notified by FBR)_ 17 percent
