Petrol price: Opportunity (and) cost

Petrol prices went down by 4 percent over previous month. While, any price relief is a welcome one for the masses, people were expecting a little more relief. The pace at which the international crude oil prices have fallen, is well-documented. The benchmark Arab Light crude oil went down 9 percent on average versus previous month. Only a 4 percent price reduction, therefore, has not gone down well with people.

The sensation loving media, on the other hand, blew it to an entirely other proportion. Even the ‘business’ sections of the media were seen quoting crude oil prices at the beginning of the month, compared with the month-end levels – giving the impression that the oil prices have in fact fallen by near 20 percent. The law of averages still appears an alien concept to a few.

Back to the numbers. The total tax incidence of Rs36 per liter on petrol is easily the highest ever in the country’s documented history. The government has expectedly jacked up the Petroleum Levy (PL) to Rs19.75/ltr – also the highest ever.

It must be remembered the government is well within its rights to impose higher PL, as the Finance Act allows it to stretch it to even RS30/ltr, should there be need and circumstances. The very purpose of relaxing the upper limit was indeed such circumstances, when any sizeable reduction in global oil prices allows for beefing up tax revenues, without having to increase retail prices. And then the fact that PL is not supposed to be distributed amongst the provinces, adds more sense for the government to opt for higher PL, while keeping GST capped at 17 percent.

That said, no one should lose sight of the fact that today’s government, when it was on the other side of the benches, was overly critical of such practices. The government was all for passing on the entire benefit to the consumer, when the consumer bears the brunt of adverse oil price movement. That was very noble but might have been divorced from reality. The government will have to face the criticism, all of which is not entirely, undue.

The government is still a percentage point shy of hitting the highest ever petrol tax incidence in percentage terms. What needs to be asked is the question that could it not have been better had the government passed on the entire benefit to the end consumer? Some will say, lower oil prices, have made way for an additional Rs6-7 billion, in PL taxes for the month. This is crucial at a juncture where the FBR is struggling to keep up with the target.

But there rises a question if the government could have brought down the prices by a higher magnitude, to lower the year-on-year change from CPI perspective. Given a sizeable weightage of petroleum in the CPI basket, could this not have hastened the inflation slowdown and resultantly the reversal in interest rate cycle? Is there any sensitivity analysis out there which tells, if Rs5 billion additional a month on PL is worth more or less than an expected drop in interest payments? Or is it too much to ask?