Clarity required in fuel price mechanism

Long have people been told that international crude oil prices have a direct consequence on the price of retail petroleum products in Pakistan. Direct it maybe, but with an abnormal degree of variance when compared to the changes observed in fuel prices in the rest of the world.
This is the very reason why the analysts closely following the oil prices predicted a 5 to 6 percent reduction in petrol prices for March. But, that estimate was horribly off the eventual notified petrol price, which was revised downwards by just 0.9 percent.
Based on such a major deviation from the consensus estimates, an analysis was run in these very columns in an effort to determine what caused such a difference. The analysis was based on the assumption that the Arab Light crude oil prices are used as the benchmark to determine petroleum prices in Pakistan - a study that turned out faulty.
Ogra has stated that local petroleum product prices are determined by using 30-days average of the price of Arab Gulf (AG) of the relevant petroleum products. This comes contrary to what the article in this column then mentioned, although it was based on the information received from official sources in Ogra.
There is a need to understand the mechanism of the fluctuations in the price of Arab Gulf reference products, which provide a baseline for the determination of local petroleum products prices.
The reason why the predictions of changes in local petroleum products vary so drastically from the actual result is the degree of correlation of the reference product price with the international oil price.
For arguments sake, the Arab Gulf price of Gasoline 95 RON, a reference product used to determine the petrol price at home, could be considered as the case in point. The gasoline 95 RON price has a weak correlation with international oil prices, which is why the proportion of change every other time Ogra notifies the petrol price, is far from constant and follows no obvious pattern.
In contrast, the correlation for petrol prices with international crude oil in the United States is very positive at 91 percent. This makes it easier to predict the change in the petrol price, by simply keeping a track of international oil price movements.
The petroleum products pricing mechanism may be very transparent as maintained by Ogra and there is no questioning that the Arab Gulf reference products may have different dynamics - but it does lack a sense of relevance.
It would be better, if Pakistan uses more relevant and easy-to-track reference products, which have greater correlation with the readily available international oil prices.

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CHANGE IN REFERENCE PRICES

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International oil price    4.07%     -4.95%    6.05%    -3.40%

US gulf gasoline            3.42%    -2.67%    8.06%    -3.72%

MS RON95                    7.11%    -1.31%    8.33%    -1.40%

USD/PKR                     0.26%     0.74%    0.60%     0.43%

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Source: Ogra, EIA