Pakistan: Fixing oil prices

The formula for fixing oil prices in the country has come under a lot of criticism. While the government is generally forced to increase domestic oil prices due to rising oil prices in the international market, ordinary people criticise the government for its apathy towards the plight of average consumers; they also accuse it of stoking inflation. In order to avoid this blame-game, the government is reported to have decided to pull itself out of the process of fixing prices of major oil products, limit the role of the Oil and Gas Regulatory Authority (Ogra) and allow marketing companies to fix retail prices with effect from 1st September, 2012. According to officials of Ministry of Petroleum and Ogra, the Economic Co-ordination Committee (ECC) of the Cabinet had decided as far back as in 2009 to deregulate oil pricing and gradually transfer the responsibility of determining prices to marketing companies. For some time the companies have been fixing the prices of High Speed Diesel (HSD) themselves while prices of other oil products were adjusted by the government; previously on a monthly basis but presently on a fortnightly basis. According to certain officials, a recent ECC decision to revise oil prices on a weekly basis, which has not been implemented so far, has made it very difficult for Ogra to complete the process within a week and submit it to the ministries of petroleum and finance for approval in time. Moreover, the price revision on a weekly basis would make it even harder to ensure regular supplies of oil products to the consumers. Already, whenever the government was in the process of determining the prices for the coming fortnight, the media leaked the expected announcement which resulted in scarcity of products as retailers took recourse to hoarding and black-marketing. Permission to allow companies to fix prices themselves would also redress all such issues. The adoption of new framework for oil prices in the domestic market by the government has certainly some merit. It could be justified on purely economic grounds since the economy is supposed to operate at a more optimal level when prices of inputs and other commodities are determined by market forces and their consumption responds to price signals. However, from government's point of view, such a decision would be preferable since it would divert public anger over oil price increases from the government towards oil marketing agencies, without having any adverse impact on the fiscal situation. The government currently charges a levy of Rs 10 per litre on petrol, Rs 14 on HOBC, Rs 6 on kerosene and Rs 8 on HSD in addition to 16 percent general sales tax on these products. The total tax collection on account of petroleum levy and GST is about Rs 25 billion per month. It is widely believed that if at any time, the government felt that the impact of price hike was too high it could always step in by lowering its share of petroleum levy by advising the marketing companies accordingly. However, it is quite clear that such a step could only be taken when the government's fiscal position is comfortable to provide such a space. In any case, consequent to the implementation of the decision, the prices of oil products could be much more erratic as these could vary almost every day and according to the location of sales outlets of a company. It could create some public unrest but the focus of such irritation this time would not be the government but other players in the market and international agencies, including the Opec. However, while implementing the new pricing mechanism, the government cannot absolve itself completely of its responsibility to keep a close watch on the oil price trends in the domestic market. It must ask Ogra to continuously monitor prices at retail outlets through its enforcement wing in order to ensure that retailers are providing fuel regularly throughout the country at reasonable prices. The CCP has also to play a more active role in thwarting any hidden ploy to form monopolies in the oil sector. Chances of such a collusion cannot be ruled out due to a very limited number of oil suppliers in the market. At the same time, the government must strive to improve country's fiscal position so that it could intervene in the market if there are excessive price fluctuations or prices in the international market rise to a level where subsidies are seen to be unavoidable.