Fuel price dynamics

To the pleasure of the consumers, the government has decreased the petrol prices for July 2017 by Rs1.5 per litre as the government continues to provide a subsidy of around Rs2 billion on petroleum products.

However, this doesn’t necessarily mean to be moving in tandem with the international crude oil prices as fuel prices (gasoline prices) are rather ‘administered’ in the country. The central Bank’s third quarter report explains this management of petrol prices as only when the government decides to pass on the impact of any global development and/or domestic demand/supply gap to consumers.

The illustration shows how the trend in global gasoline prices has reversed in recent times, especially from February 2016 to March 2017; and how countries have responded to the up tick in crude oil prices when adjusting their domestic fuel prices. It can be seen that the increase in domestic fuel prices as a result of rising crude oil prices has been the smallest for Pakistan i.e. market driven and more politically administered.

Why is this so? It has been witnessed that since the global oil price crash, the government has restrained from passing on the entire impact of lower crude oil prices to the consumers for some right reasons. However, globally this is at a stark difference to China, India and many others.

The SBP highlights the elections in 2018 where it says that while the government has started passing on some of the impact, prices may not at increase at a very high pace going forward.

This relatively slower pass on of the prices has also been around when the country has upgraded to premium quality of petrol RON 87 to RON 92, to which the central bank warns that the consumers need to pay quality premiums.

So is price increase on the cards? Might not be so immediately, but the central bank has cleared off some misconceptions pointing out that domestic petrol prices might gradually be raised in the medium term to offset some of the incremental cost of upgrades.