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BR Research

Curious case of (high) petrol consumption

The story on petrol shortage is known to us all. If not, read “Petrol Saga: Who to blame”. The problem now is...
17 Jun 2020

The story on petrol shortage is known to us all. If not, read “Petrol Saga: Who to blame”. The problem now is that the regulated product supply is jacked up to all time high in June (so far) but there is still a shortage up north. The life is nowhere close to normalcy and most of the readers are consuming less than their respective normal use of petrol. But on paper the consumption is too high. There is something fishy.

The daily average demand of petrol was around 20,000 tons/day in Jul19-May20. And in the first 12 days of June, the demand increased to 26,700 tons/day. On prorated bases, June sale is estimated at 800,000 tons. The consumption was 439,000 tons in April and that was increased to 663,000 tons in May. In June 2019, the petrol sales were around 614,000 tons. What is happening in this June!

Since the petrol price in Pakistan today is at steep discount to international prices, there is shift of all kind of demand towards formal petrol supply system. One reason for the staggering growth in demand could be the ease in lockdown – but that had already happened in May 2020 as demand was too low in April. Then there is shift of CNG consumers to petrol as the latter is cheaper than CNG today. But these are not enough reasons to explain the huge uptick in demand.

The other reasons are shady. There is a norm of unknown quantity of smuggled petrol supply from Iran. The regulated price of petrol in Pakistan is probably even lower than Iranian smuggled petrol. Hence, there is no incentive to smuggle. The demand is shifted to the regulated sector. Then there are numerous illegal (or abandoned) petrol pumps in Punjab where the petrol storage is intact. They probably have bought petrol from legal sellers to fill up storage. Not to mention that OMCs could have their own secret storages.

Why everyone is storing? The reason is simple. There will be significant increase in petrol prices in July (based on the formula) and the hoarders will make a windfall. The petrol is being sold at discount by PSO, refineries and others. These are making huge losses and consumer is not getting the sought demand. Everyone is at a loss, but hoarders are milking.

What a sorry state of affairs. The energy ministry, OGRA and ECC all have to take blame. OMC should not be spared either. But OMCs have a point here. They are being scrutinized by media and regulator for not keeping 21 days’ stock. What consumption level should they keep in mind for maintaining stock. In April, the consumption was half of that in June. Based on that, the stocks in June would be of 10-12 days of effective consumption. But they should keep stocks based on average daily consumption of last 12 months.

The other problem is that the price difference is too high, and the government had made some decisions which have consequences. Such as banning of petrol imports in March/April and fixing of June price based on effective April import price. In April, the petrol was at its lowest and the ex-refinery price in June is based on that. Today, local refineries are making Rs17/liter loss on petrol. In June alone, the loss is estimated at Rs18 billion from OMCs and refineries.

PSO, PARCO (government owned companies) and refineries are making huge losses (by importing at higher rate and selling at a discount); and the hoarders will make quick bucks by selling the petrol next month (once the prices are revised up). What a mess, one musty say!