Rise in furnace oil prices

The local oil marketing companies have increased furnace oil price in the domestic market on five different occasions over the past four months, which has pushed up the price to an all-time high of Rs 26,745 per ton, says a Recorder Report.
Although the dealers have attributed price increase to soaring oil prices in the international market over the last four months, well-informed oil industry sources maintain that there has been no significant change in the pattern of international oil prices during this period. According to figures quoted in our report, in mid-March the furnace oil price stood at Rs 22,814.35 per ton in the local market, which went up by Rs 848.70 per ton to Rs 23,663.05 per ton on March 16.
On April 1, the oil marketing companies again increased the price by Rs 786.60 per ton, and on April 16 by another Rs 1,949.25 per ton. On May 2, the price surged by Rs 297.80 per ton; and on May 16, it was increased by Rs 48.85 per ton. However, the oil marketing companies also decreased the furnace oil prices by Rs 142.60 per ton.
The rapid rise in the furnace oil price from Rs 22,814.35 per ton in mid-March to an all-time high of Rs 26,745 per ton should be a matter of deep concern to our economic managers, as furnace oil is mainly used by Wapda, KESC and private sector IPPs as fuel for power generation. It also serves as a major raw material in a number of key industries in the country, including cement, fertiliser, textile and steel re-rolling. Not only is the present rise in furnace oil price, preceded by four other increases over the last four months, bound to have a multi-pronged escalatory impact on power generation sector, it will also have an effect on other key areas of the economy such as construction and textile industries.
According to sources quoted in our report, the oil marketing companies have raised the furnace oil prices in the absence of any significant change in the pattern of international prices during this period, which makes it an arbitrary increase, unless the marketing companies come out with a cogent justification for the raise.
Fuel cost is a key determinant of inflationary trends in a country, be it that of furnace oil or of other POL products. According to experts, every 10 percent increase in the fuel cost adds one percentage point to the inflationary pressure, with all its deleterious impact on the economy.
Have the oil marketing companies increased the furnace oil prices on their own, or with the approval of the regulator, ie, the Oil and Gas Regulatory Authority? In fact there seems to have been some confusion in the operational parameters of OCAC, a private group comprising heads of nine oil marketing companies, and Ogra, which was empowered last year to determine POL prices.
However, there was also a perception at that time that instead of actually overseeing the price increase mechanisms and also fixing the prices, the regulator's role would be confined largely to "vetting" the prices already worked out by OCAC. Last year the World Bank had asked the government to assign the job to an independent body outside the petroleum ministry, and also rationalise the whole mechanism, which gave the "appearance of a collusion" between the government and the oil industry.
According to available data, fuel prices in Pakistan have registered an increase of over 500 percent since the early 1990s, and a major part of profits made by the oil companies may well have been due to inventory gain because of a rapid increase in oil prices. It should be mentioned here that the World Bank has been funding a $3 billion energy sector restructuring programme in Pakistan, and is keen to see oil and gas sector regulation transferred to Ogra, an autonomous body with adequate public representation.
As furnace oil is mainly used in the power sector, an increase in its price may well prompt the IPPs to ask for a tariff revision, which will further burden the consumers. Further, the local cement industry's production capacity of 24 million tons is projected to increase to 37 million tons, in view of the spurt in construction industry, and the government's plan to undertake mega water and power projects. This will also entail a substantial increase in demand for steel products, necessitating increased steel production.
The increase in furnace oil prices is therefore a highly negative development, which the government should counter by maintaining oil price stability in the domestic market.
This will not only be essential for proper growth of power, textile, fertiliser and cement sectors, it will also help contain the inflationary trends which are bound to escalate if counter-measures are not immediately initiated. Ogra is required to play a true regulator's role to keep a check on oil marketing companies' propensity for arbitrary increases in fuel prices.