Whos next to pay for oil? Refineries

The rumour mill has been grinding the news that refineries will soon be stripped of the 7.5 percent deemed duty that they have been enjoying on High Speed Diesel since long. The strategy, reportedly, is to abolish the deemed duty in a phased manner and not at once. The move is motivated by the political pressure on high petroleum prices in Pakistan, which the government has been unable to pass on so far, taking the hit on its revenues.
Now when there is not much room left to absorb the petroleum prices as the Petroleum Levy has already been squeezed up to a minimal level, the government thinks it is time for others to bear the brunt. There is not much the government can do about the OMCs margins as they have already been fixed at absolute levels, so the only other option left is to remove the lid of protectionism for the refineries in a bid to maintain petroleum prices and sustain the political pressure.
The refineries have naturally resisted the proposal citing that any such move would lead to the closure of the industry. There is no denying that the refineries will face pressure on their profitabilities as the gross refining margins of late have been considerably on the lower side. But, there seems exaggeration in the refineries claim of the removal of deemed duty leading to complete closure of the industry.
Analysts following the refinery sector believe that due to higher global oil prices, refineries will be able to sustain the cut in deemed duty and the gross refining margins may still remain positive, contrary to the claims made by the refineries. The improved GRMs in 1HFY11 would allow refineries to hedge against the possible abolishment of the deemed duty, so a closure of refining business is, indeed, an overplayed fear.
The refineries will play the card of being a strategic asset to Pakistan and they demand protectionism on the very basis. But the judicial commissions report on petroleum pricing suggests otherwise, as it asked the government to discontinue the deemed duty as it has failed to serve the purpose.
There is no doubt, the purpose has not been achieved, as all that the refineries did of the special reserves was to guard themselves of the losses that followed after five years of massive profit making,
The argument that refineries in Pakistan are hydro-skimming units and thus require different treatment as their profit margins are considerably lower, does hold water. But the attitude of refineries towards upgrading their facilities has been rather disappointing as nearly all of them have put on hold the work on deepening the refineries - seeking more incentives from the government.
Had Pakistan been in good economic shape with the government having enough to spare on subsidies, protectionism would have made at least some economic sense. But, in these times of distress where the government faces high fiscal deficit, asking the public to pay for future uncertainties, under-utilisation and inefficiencies of the refineries is too much to ask.