The challenge around petroleum price

The benchmark Arab Light crude oil went up by 5.7 percent month-on-month in the reference period for Aug-20. The rupee lost 1.5 percent to the dollars in the same period. Ogra, as a result, recommended an increase of Rs7 per liter and Rs 9 per liter in petrol and diesel prices, respectively. The government could not do that. It had to give up on the maximum Petroleum Levy (PL), that had stayed in place for no more than two months.

This space has time and again highlighted that the PL collection target at Rs450 billion for FY21 is outlandish, and the government’s ability to pass on the international oil prices will be tested, with even minimal changes (see: Petroleum Levy scenario analysis, published Jun 17, 2020 & Islamabad’s Petroleum Levy daydream, published Jun 15, 2020). And the government buckled down under pressure, with just a 5 percent month-on-month increase in oil prices – and had to give up Rs3.5/liter in PL on both petrol and diesel. Petrol prices moved up by 4 percent – as PL had to be brought down.

Although inflation has subsided of late, it appears the government does not want to let the petroleum prices go off the hook. The prices would still have been lower on year-on-year basis, had the government opted to continue with the maximum PL allowance. It increasingly appears the government’s plans on PL revolve around hoping a yearlong stability, both in international prices and rupee dollar parity.

If Jun-20 petroleum sales numbers were not an anomaly, and the illegal petroleum business remains curtailed (unlikely) – then the government can hope to come close to the annual PL target. Recall that the FY20 petroleum sales for diesel and petrol combined at 16.7 billion liters was a four-year low. One would expect demand to improve in FY21, even if it is not a massive resurgence. A 10 percent increase in demand, could fetch Rs468 billion – Rs 18 billion above target – at a PL of Rs25/ltr, with a dollar worth Rs165.

Mind you, the petrol price in the case of PL at Rs25/ltr even at current international oil price will be north of Rs100/ltr. Now that is one tough equation. There have been reports that the petrol prices will be reviewed and adjusted n fortnightly basis from this month on. The proposal is not new and there have been a few instances of the same in the past – but the practice was discontinued. This could at least offer the government more room to adjust taxes, in line with consumption patterns during the month, in addition to the more obvious benefit of reflecting prices closer to actual prices and minimizing the inventory losses.