The 10-point agenda - I: Petroleum pricing

I would like to offer a few thoughts on some of the ten points that were the subject of deliberations among the two mainstream political parties, namely prices of Energy and of Essential items and the reduction in government expenditure. There may not be quick fixes, for if these were there, the government may not have been foolish enough not to implement those.
However, there are near-term solutions that may offer some scope of progress in these respects. Neither has the PML (N) has been able to point out any specific measures. In most bureaucratic circles, and especially among those in Pakistan, problems are not deemed to be solvable and venturing on any solution is dubbed as naïve and not fashionable. I will venture to appear naïve, and be optimistic that some of the problems are indeed solvable, albeit not immediately.
The recent petroleum price rise announced by the government has been basically motivated by the phenomenal increase in crude oil prices at USD 110 per barrel, as opposed to 87 USD per barrel only last month. While it may be legitimate to pass on the increase of crude oil prices, the charging of Petroleum Levy when the basic prices are so high is unwarranted and unadvisable.
If the petroleum levy was unacceptable and was withdrawn last month at relatively lower crude oil prices, where is the magic wand which would placate the general public and make them accept the tax now? There are only two possible explanations; a) it is a negotiating instance b) the advisors' of the government are not sincere about and want it to pack up sooner or later. Perhaps the former is more likely, as news is coming in of some compromise and downwards revision.
Under the revised announcement, the gasoline price has been reduced to Rs 76.58, and HSD to Rs 82.22.The net increase in prices is now 5%, as opposed to 9.9% as announced before, on March 1, 2011. The Petroleum Levy (PL) is Rs 3.16 per Litre on Gasoline and 44 paisa on HSD. Comparatively much less PL on HSD seems to be a step in the new and the right direction, as previously, HSD used to be penalised as against Gasoline with a high PL.
It is rather difficult to understand the mind that has been working on the application of the Petroleum Levy. As common sense would tell, the Petroleum Levy and prices should move in the opposite direction for the purpose of price stabilisation; when crude oil prices are high, the PL should come down and vice versa. As they say, common sense is not common. The reverse seems to be the case.
During the peaks of 2006, the PL was higher, as prices were, and then the PL went low in 2007, when the crude prices came down. Then at the peak in 2008, when Petroleum prices crossed Rs 100 (for Gasoline), the PL went at its highest, crossing Rs 25 per litre, triggering (although unwarranted) Supreme Court involvement and its committee. Had the opposite taken the case, the prices would have been affordable, relatively speaking. For most part of 2009, the GoP could have levied a little more PL, than it did.
While 2010 went almost all right with manageable crude oil prices and a constant PL, the continuation of the same became unaffordable and unacceptable with the high crude oil prices; and hence the continuing acrimony since the advent of the year. An almost withdrawal of PL, seems to have settled the issue. Unfortunately, the reader would not be able to view the accompanying graph, which would have so graphically described, what can almost be called the, 'Petroleum Levy saga'
Also, there appears to be some hidden padding in HSD prices, as LDO (light diesel) had been priced at Rs 73.21 per Litre, as opposed to Rs 86.09 for HSD; both are essentially the same products. Bringing HSD prices to LDO level can have quite a salutary effect on the economy by pushing down the mounting inflation and as well as the people's welfare.
With the total withdrawal of Petroleum Levy, the GoP loses Rs 37.50 billion (10 billion litre HSD consumption at Rs 3.75 per lit PLD), from diesel and Rs 12.50 billion (2 billion litre gasoline consumption at Rs 6.25 per Lit PLD), which totals to a rather staggering sum of Rs 50 billion per year or Rs 4.2 billion per month. The latter figure is more valid as, the price decision is for one month; and the same problem will emerge next month again. To avoid such frequent politicisation and controversy, we have made a proposal in the following.
But before that, it may be useful to have some comparison with international gasoline and HSD prices. There are two benchmark prices; one of the USA which traditionally maintains the lowest prices among OECD countries and the other of Luxembourg, which maintains the lowest in Europe. In the USA, the average gasoline price is Rs 76.62 per litre and the HSD price in the USA is Rs 84.17. By comparison, the prices in Luxembourg are Rs 145 per litre for gasoline and Rs 140 for HSD.
In France and Germany, these prices are in the range of Rs 170-190 per Litre. Traditionally, Europeans charge heavy taxation on Petroleum products. The low prices of Petroleum products in the US are due to low taxation, lower crude oil prices and more competitive and efficient oil industry.
In our region, in India, Gasoline price, as last revised on 1st March, 2011 stood at IRs 63.08 (PkRs 119) per litre in Mumbai and roughly around the same figure in other major metropolitan regions, except Delhi, where the prices are kept at 5 IRs lower, interestingly. Similarly diesel prices were set on September 8, 2010 and remain unchanged till today (March 4, 2011). In Mumbai, it is IRs 42.06 (PkRs 79.33) per litre. Petrol is 50% more expensive than diesel or alternatively diesel 33% cheaper than Petrol.
The rationale is obvious; diesel is used by the public transport of goods and passengers. This point is amazingly lost on our policy-makers. Thus diesel, in India, is roughly priced the same as in Pakistan, only PkRs 3 cheaper than Pakistan.
The gasoline price in India (PkRs 119) is 55 % higher than that in Pakistan (Pk.Rs 76.58). Due to higher share of diesel in overall fuel consumption, 4-5 times more than gasoline in both the countries, a small subsidy in diesel results in a 4-5 price premium in gasoline. Pakistanis seem to be doing the opposite; premium on diesel, subsidising gasoline. Result; there is mayhem on the streets.
However, some non-traditional ways may have to be explored. Firstly, it is widely known that Saudis offer some concessionary prices to Pakistan that is not perhaps passed onto the consumer. The whole issue of oil pricing has to come into open with no holds barred, keeping in view the gravity of the situation. Secondly, it may be advisable that the government reviews the month-to-month price adjustment policy to replace it with a yearly or half-yearly price adjustment.
The international oil price increase can be temporary at times, due to seasonal or transitional issues such as the trouble in Libya. Passing on price increases immediately, causes hardship to the general public, undue profiteering of the petroleum dealers at the time of frequent changes, and generates public discontentment among many other side effects as well. Temporary and fluctuating oil price increase creates permanent inflation, as the indirect inflation does not come down instantly, with oil price decreases. It is possible, as it used to be a practice before and is still done in many countries including India and Bangladesh. As the government is short of cash, a price stabilisation fund can be created through agreement with international suppliers and friendly countries with zero-net cost at the end of the year.
Some improvements in the situation can be made by reversing the current policy of maintaining higher prices for diesel, and lower for petrol. In the old days, many developing countries even subsidised diesel due to its use by public and goods transport. Even now, in most countries except the USA, diesel is kept cheaper. The space for discussing the pros and cons of the existing policy is not there .The public purpose is huge enough to warrant a review and reversal in this respect. It has to be done gradually; otherwise the motorcyclists would be enraged. Some creative solution should also be explored to separate the motor fuel from that of motorcycles that may broaden the targeted subsidy option of the government.
By now, some working rules on Petroleum pricing and management must be developed under a bipartisan understanding. The following suggestions may be considered:
a) Import quantum restriction to a maximum of 10 Billion USD, beyond which some rationing scheme should trigger.
b) A maximum PLD (say) of Rs 10 per litre on floor price of (say), of USD 75 per barrel.
c) A zero PLD at crude prices of 100 USD per barrel, and pro-rata for 76-99 USD per barrel.
d) GST cuts to be triggered at crude oil prices of USD 125 per barrel, in addition to zero PLD.
e) Use of price stabilisation fund (internal and external) to avoid frequent changes in oil prices.
However, old-fashioned it may sound, Pakistan may have to go in for rationing both in the energy and food sectors; in the case of petroleum for demand management and in food for targeting prices and subsidies. Prices do not always act as rationing instruments for a variety of reasons, especially when a large number of people and sectors are able to pass down the load to others and ultimately to the weak and impoverished consumer. The proposed rationing may be used for directing subsidies to the intended recipients. The whole of Europe went into rationing of petrol in 1973.In the proposed rationing, to be introduced at an unbearable stage in oil pricing, the defence sector may have to be involved as well.
(To be continued tomorrow)