EDITORIAL: With international oil prices retreating after the reopening of the Strait of Hormuz, the government’s decision to slash petrol prices by Rs74 per litre and high-speed diesel’s by Rs67 has understandably been welcomed by consumers. The move, however, has also provoked a strong backlash from oil marketing companies and refineries, which estimate losses of Rs105 billion and have called the move unilateral and inconsistent. While driven by commercial concerns, their protests also highlight a deeper structural problem: the government’s outsized role as price-setter in the petroleum sector.
It bears noting here that the industry’s protests are not without irony. When oil prices first surged following the Strait of Hormuz’s closure, OMCs had benefited from windfall gains on inventories procured earlier at lower international prices. Today, however, they argue that repeated changes to the pricing mechanism have left them bearing disproportionate costs. According to industry representatives, the government has switched between weekly and fortnightly pricing averages to the sector’s disadvantage. And in its latest decision, it reportedly used a three-month average of import premiums instead of real-time weekly or bi-monthly costs typically reflected in the pricing mechanism. These frequent shifts have complicated financial planning and undermined confidence in the regulatory framework.
Yet the issue extends well beyond the latest price cut. The underlying problem here is that Pakistan’s petroleum pricing regime has for decades been shaped by administrative controls that run contrary to basic market principles and economic logic. Through the Inland Freight Equalisation Margin (IFEM), fuel prices are kept uniform across the country regardless of actual transportation costs, with consumers farther from ports or refineries paying the same as those closer, the difference absorbed through this cross-subsidy.
Though originally meant to ensure fairness and price stability, IFEM has often produced the opposite effect. By disconnecting prices from real costs, it created opportunities for inflated freight claims, logistical manipulation and arbitrage. Fuel designated for one region could be diverted elsewhere for excessive profits, undermining supply chain efficiency and creating shortages and market distortions. While stricter regulatory oversight has reduced these abuses in recent times, the core flaw persists: prices remain determined administratively rather than by market realities.
Pricing in the petroleum sector reflects a broader tendency in Pakistan’s economic governance where state-led pricing has generated uncertainty, inefficiency and rent-seeking. A similar pattern can also be observed in the electricity distribution space, as the government moves to privatise three DISCOs. The PM’s adviser on privatisation has indicated that buyers will be offered a guaranteed 18-20 percent internal rate of return to attract investors. Besides raising questions regarding where entrepreneurial risk actually sits when the state is guaranteeing high returns for entities that are already a monopoly, more critically, the privatisation strategy highlights that the government has still not fully grasped that it is its own price-setting role, along with the rigid pricing formula it enforces, which has proven to be a major deterrent for potential investors.
Much like the uniform pricing structure in the petroleum sector, Pakistan’s electricity pricing framework also relies on uniform tariffs, alongside an insistence on 100 percent bill recovery from DISCOs. Yet DISCOs are constrained from enforcing full recovery, particularly as they are in essence barred from disconnecting supply to essential public utilities such as water and gas providers, even in cases of non-payment. This contradiction leaves them exposed to persistent cash flow pressures. The experience of K-Electric underscores these structural tensions. Despite being privatised two decades ago, it has been unable to distribute dividends to shareholders even once as it has struggled under the weight of regulatory constraints. Against this backdrop, it is clear, then, that achieving efficiency, investments and fiscal stability will require the government to begin ceding control over pricing architectures across key sectors and ensure competent, empowered and autonomous regulators for these sectors.
Copyright Business Recorder, 2026
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