Protecting consumers or balancing the books: Pakistan’s oil dilemma – Pakistan

Countries across Asia have moved swiftly to shield their economies from the energy shock. South Korea plans to cap domestic fuel prices for the first time in nearly three decades and may expand a $67 billion market-stabilisation programme while seeking alternative energy supplies beyond the Strait of Hormuz. Japan has instructed a national oil reserve site to prepare for a possible crude release. Vietnam intends to temporarily remove fuel import tariffs to secure supplies. Indonesia will increase energy subsidies and may revive its biodiesel plan to reduce reliance on conventional diesel. China has asked refiners to halt new fuel export contracts to protect domestic supply. Bangladesh has closed universities early for Eid holidays and imposed fuel rationing to curb panic buying and conserve energy.

The decision to increase domestic petrol and diesel prices has drawn considerable public criticism, including from former finance minister Miftah Ismail, who argues that the move has effectively transferred roughly Rs19bn from struggling consumers to oil companies — an outcome that reflects either serious policy misjudgment or undue influence by the oil lobby.

Under the existing pricing mechanism, the government calculates petrol and diesel prices using the 15-day average of daily closing prices for Dubai and Oman crude published by Platts (now S&P Global Commodity Insights) to determine domestic prices of diesel, petrol and other products.

To this base price, the actual cost of importing the fuel, including freight, insurance and other charges incurred by the PSO, is added to determine the landed cost. The government then applies a 10 per cent customs duty and adds the margins for oil marketing companies and dealers, along with the petroleum levy. A freight equalisation cost calculated by Ogra is also included to ensure uniform fuel prices across the country. This combined formula determines the retail price of petroleum products for consumers.

The government defended the decision by pointing to the sharp spike in global oil prices after the attacks on Iran began. This sudden increase created a strong expectation in the market that domestic fuel prices would rise significantly in the second half of the month.

Authorities feared that this expectation could trigger hoarding by consumers, petrol pumps, dealers and oil marketing companies (OMCs), potentially leading to shortages in the market. There was also the concern that importers might slow or suspend imports to avoid potential losses if domestic prices were not adjusted in line with rising global prices.

To address these risks, the government decided to shorten the existing fuel price revision cycle from a fortnight to seven days. This change — which local refineries and OMCs had been demanding for a long time — was intended to allow domestic fuel prices to reflect global price movements more quickly, discourage hoarding, and ensure that imports and supply continued without disruption.

Miftah Ismail wrote that the government’s reasoning is understandable. However, he noted that domestic prices for petroleum products for March 1–15 had already been revised just a week earlier, on February 28, using the average import price for the second half of February. By changing prices in the middle of this already determined period on March 7, the government effectively handed oil companies and dealers a windfall gain, he maintained.

“The oil companies had already bought the petrol and diesel being sold now before Feb 28 at lower prices. And their costs plus profits were already being covered by the prices set originally for March 1 to 15. There was absolutely no reason to increase their prices and allow them excessive profits. This is just taking advantage of a crisis and allowing them excessive profits. If the government wanted to move to a seven-day pricing cycle, it should have done so at the end of the existing fortnightly pricing period.”

According to him, to discourage hoarding in the meantime, the government could simply have increased the petroleum levy instead of raising the base price of fuel. That approach would have discouraged stockpiling while allowing the government to collect the additional revenue itself rather than passing it on to oil companies.

However, he did not explain how this approach would have stabilised market sentiment at a time when global oil prices were swinging wildly. With international prices rising sharply, importers and dealers were expecting domestic rates to adjust accordingly. Simply raising the levy without changing the base price may not have prevented hoarding or ensured uninterrupted imports and supply. Importers and dealers still expected domestic prices to eventually reflect the higher international rates, and without that adjustment, the incentive to delay sales or imports could have persisted.

But Zahid Mir, an oil industry veteran and former managing director/chief executive officer of OGDCL and Pakistan Refinery Limited, argues that global market developments can rapidly alter these calculations.

“On February 28, following attacks by the US and Israel on Iran, international petroleum markets reacted sharply when trading resumed on March 2. Global prices of crude and refined fuels surged. Petrol and diesel prices are typically higher than crude oil because they are refined products, and their prices rarely move in tandem. Instead, they fluctuate according to their own demand-supply dynamics, which can cause a significant gap between the two,” he elaborated.

By that time, players across the supply chain — from petrol pump owners to oil marketing companies and refineries — were anticipating a steep increase in domestic prices. “Market expectations were that by March 15, when the government was scheduled to revise fuel prices for the next fortnight, the surge in average Platts rates could translate into an increase of up to Rs100 per litre,” Mir, who is currently managing director/CEO at Uch Power, explained.

When international prices surge, he says, refineries do not stop producing petrol and diesel, nor do importers halt shipments. Instead, importers begin bringing in fuel at the new, higher global prices while the existing stocks — estimated at around one billion litres across refineries, oil marketing companies and petrol pumps — were purchased earlier at lower rates. “No importer would willingly buy fuel at higher prices and sell it at lower domestic rates, especially when there is uncertainty about whether international prices might fall within the next 10–12 days. Selling below replacement cost could lead to significant losses.

“If retail prices are not adjusted in line with rising import costs, distortions begin to appear across the supply chain. Importers may slow down purchases, while pump owners and distributors may hold back supplies in anticipation of higher prices and potential inventory gains. Such behaviour can quickly lead to shortages at fuel stations.”

It was against this backdrop of rapidly rising international prices that the government chose not to wait for the usual 15-day price revision cycle. Instead, it shortened the pricing period to seven days to respond more quickly to market changes and to preempt potential shortages at the pump. This step helped ensure the continued flow and availability of fuel in the domestic market.

Based on prevailing international prices at the time, diesel prices should have increased by about Rs75 per litre, while petrol prices would have risen by roughly Rs25 per litre. To moderate the impact, the government reduced the petroleum levy on diesel by Rs20 per litre while increasing it by the same amount on petrol — resulting in an identical price rise for both fuels. This approach allowed the government to protect its petroleum levy revenues while easing some of the burden on diesel consumers, who are closely linked to the transport and agricultural sectors.

This approach also highlights a broader policy issue. In Pakistan, petroleum product prices are strictly regulated, with the government setting retail rates for consumers. Most countries have, however, moved to complete price deregulation, allowing markets to adjust fuel prices daily in line with international movements, while governments focus primarily on collecting taxes. Where authorities wish to cushion consumers from volatility, they typically adjust fuel taxes to stabilise retail prices.

Pakistan too had originally conceived the petroleum levy as a shock absorber, a tool that governments could use to cushion consumers during periods of sharp global price volatility, industry sources say. In practice, however, it has increasingly become a major revenue source. Rather than being deployed to stabilise consumer prices during crises such as the present one, the levy is largely being maintained to help the government meet its revenue commitments under the IMF programme.

Khawar Jillani, former CEO of Asia Petroleum, argues that the government should have offset the increase in product prices by cutting the petroleum levy by the same amount, shielding consumers from the additional burden while still discouraging hoarding.

“Faced with a sudden surge in global prices, the government opted to increase domestic fuel rates sharply in line with international trends to prevent shortages, queues at fuel stations and panic buying, while also protecting petroleum levy revenues. It is difficult to defend this kind of hike in petrol and diesel,” he told Dawn. “But the IMF would not have agreed to a reduction in the levy, as it would have widened the revenue shortfall.”