Fishy obscurities in ransparent fuel price mechanism

Barring a few investors, a vast majority of Pakistanis welcomes a significant reduction in international oil prices. The interest has grown keener especially in the post subsidy-removal days of today, where retail petroleum prices are said to be linked directly to any changes in global crude oil, through a mechanism that has been termed as ransparent.
However, the reality appears to be different, as with the so-called transparency called into question after Ogras recent price revision. The Oil and Gas Regulatory Authoritys latest fuel price notification for March has left many disappointed - from the analysts community to ordinary folks.
With international crude oil prices falling sharply during February, a substantial cut in retail petrol prices was widely expected across the board - only to be disappointed by a negligible one, of just 0.9 percent in the price of petrol.
The case in point demands a detailed analysis of how the pricing mechanism works and what leads to a failure in prices being reduced in proportion to the international crude oil prices.
The price of Arabian Light crude oil, which is used as the benchmark for determining final petroleum prices in Pakistan, went down by 4.25 percent in the reference period for March. This decline led many to believe that the petrol prices for March could go down substantially, as in the preceding month, a 2.7 percent rise in Arab Light crude oil pushed domestic petrol prices higher by 9 percent.
Moreover, the price of Mogas (petrol), as per Ogras notification slumped by just 1.4 percent, despite the fact that the price of all other components declined by a much higher magnitude.
The base price of Mogas is derived from four components (Naptha, HFSO, Kerosene & Gasoil) where each component is assigned a different weight. It beats the mathematical logic, regardless of the weights assigned to every component, as the price of all the components declined by more than that of petrols base price.
Not many would have complained had the same practice been followed in the case of an increase in crude oil and the price of the said components. But a nine percent increase in petrol prices in February fails to find a justification as the crude oil prices were up by 2.7 percent and none of the pricing components went as high to justify such an increase in the base price of Mogas.
Some would argue, it is the depreciating rupee that is behind this difference. But that, sadly, is not enough of a reason. The rupee was seen in a stabilization phase in February, depreciating just 0.4 percent during February, leaving enough questions to be answered by the Ogra.
The Inland Freight Equalization Margin (IFEM) is another variable that needs further explanation as it has been abnormally high in the past two price revisions. The IFEM component, which has normally been in the range of 6-8 percent of the ex-refinery price prior to the February price revision, has now crossed the 10 percent mark for no apparent reason.
Clearly the ransparent petroleum pricing mechanism has one loophole too many - and needs immediate attention from the government or even the judiciary, if it deems fit.

===============================================

CHANGE IN FUEL PRICE DRIVERS

===============================================

                 Dec      Jan      Feb      Mar

===============================================

Arab Light       7.0%    -2.7%    2.7%    -4.3%

Naphtha         10.9%     1.4%    3.9%    -6.0%

HSFO             6.5%    -1.1%    4.3%    -4.7%

Kerosene         8.0%    -3.0%    4.4%    -4.7%

Gasoil           7.7%    -4.2%    4.6%    -2.7%

Mogas            7.1%    -1.3%    8.3%    -1.4%

MS - ex ref      7.2%    -1.4%    9.3%    -0.8%

MS - retail      7.1%    -1.3%    9.4%    -0.9%

Exchange rate    0.3%     0.6%    0.6%     0.4%

===============================================

Source: Ogra, Bloomberg