What’s up with diesel?

While diesel consumption in the country has continuously increased year after years since FY13 (see illustration), recently the fuel has seen a dip in consumption. FY19 has brought subdued High Speed Diesel sales by the oil marketing companies, which is a good proxy for overall consumption of the fuel. Monthly sales data from Oil Companies Advisory Council show that HSD sales dropped by 29 percent year-on-year in 2MFY19. HSD sales in June, July and August were down by 8, 20 and 38 percent year-on-year, respectively.

This continuous monthly slide in diesel consumption has raised quite a few eyebrows as it is a leading indicator for growth since it’s used largely in commercial transportation. And it makes sense to blame a part of slowing diesel consumption to the growth momentum of the economy, which has actually come to a halt in the last couple of months. Political transition has a lot to do with the current economic activity and sources reveal the slowdown of both CPEC and non-CPEC related projects and commercial transportation has somewhat affected diesel sales.

But blaming everything to the economic scenario is not fair. While furnace oil sales have been treading down for quite a while now (as it is in the process of being phased out from the power sector), retail fuels including HSD and petrol too have seen slow volumetric sales, which many point out is partly due to Eid ul Azha and Independence Day holidays falling in the two months. (Read: Petroleum sales softening published on October 1, 2018). Plus, monthly sales data show that HSD sales peak around April-June and then fall in subsequent months remaining relatively slower in winter months, which could be another factor. Also the fact that this May-June, the importers benefited from the currency depreciation as they built excess inventory in anticipation of one time gain, which meant less consumption of diesel in the following months.

Another factor that might not have affected HSD sales as of now but certainly sets the tone for future is how the oil sector has asked the government to delay the launch of high quality Euro V diesel. Kuwait Petroleum Company, which is the largest supplier of fuel to PSO, has asked government to replace Euro II diesel procurement with Euro V by 2020. Though the contract between the two state run companies for Euro II fuel specification is till 2020, the OMC sector has serious concerns over the cost feasibility and hence commercial viability even beyond 2020. More on Euro V fuel specification in the coming days.