EDITORIAL: In the last few weeks, oil and petroleum products’ prices have risen to unprecedented levels, stirring Pakistan’s highly regulated energy value chain, from defining the margins of oil marketing companies (OMCs) to fixing consumer-level prices.
Earlier, the government was providing subsidies, which reached around Rs130 billion, followed by a steep increase in petroleum prices, especially diesel’s.
Against this backdrop, a debate has emerged among analysts and policymakers about revisiting the administered price and margin structure for oil marketing companies and refineries.
In the case of OMCs, margins are fixed in PKR per litre, which become inadequate when international oil prices rise significantly.
As per the news, there were some suggestions about switching the existing pricing formula to a guaranteed return for OMCs. That is a flawed approach and would create inefficiencies in the system, apart from a possible rise in corruption. Back in the 1970s, oil refineries used to operate on a cost-plus basis formula, which proved not to be in the interest of consumers or the country at large. That mistake should not be repeated.
The last few weeks were unprecedented, and refinery margins were extremely high. That is why there was debate about regulating them for the time being while protecting their downside. Now, with the ceasefire, oil prices are falling, and things are likely to normalize in due course.
What the government should learn from this volatility is the need to reduce its footprint in the energy value chain. It should gradually move towards complete deregulation of the energy sector, as alluded to by the petroleum minister.
Pakistan has already deregulated the prices of Hi-Octane, and the system is working well. LPG is regulated, but the pricing formula is not followed by market participants. There is no shortage in normal times, and there are no complaints about any OMC or refinery making extraordinary profits.
More than half of the market share is held by Pakistan State Oil (PSO), which can act as a balancer if any player attempts to profiteer in the event of deregulation. Pakistan should move towards deregulating petrol and diesel prices as well.
A better option would also be to end the Inland Freight Equalization Margin (IFEM), as leakages in it are well known and ultimately passed on to consumers. Moreover, there is no incentive for players to make their supply chains and transportation more efficient. This may push the government to expedite the completion of white oil pipelines in the north.
On the other hand, if Pakistan moves towards a cost-plus formula, inefficiencies in the system are bound to increase. OMCs would become complacent and avoid taking risks or committing investment to become more efficient. In many countries, OMC margins and petroleum prices are deregulated; and they function well. Pakistan should do the same. All the regulator needs to do is ensure that collusive practices do not develop. With the largest OMC being government-owned, the chances of that happening are lower.
Once petroleum prices are deregulated, the next step should be to deregulate ex-refinery prices and let the market decide. Again, the largest refinery is also government owned. Eventually, E&P policy should also be market-based to encourage more exploration and ensure energy supply, which is extremely important in a world that is becoming increasingly polarized.
Copyright Business Recorder, 2026
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