Margin of oil marketing companies: Experts hail proposal to interim increase

ISLAMABAD: The proposal of the Petroleum Division (PD) for an interim increase in the “margin” of oil marketing companies was widely appreciated by experts on the pretext that it was necessary for the survival of the industry and for ensuring uninterrupted supply of petroleum products in the country.

The Islamabad Policy Institute (IPI), a think tank hosted an in-house discussion on the government’s move to increase profit margins of the OMCs on Wednesday.

The Petroleum Division reportedly proposed an increase of 16 percent in the OMCs’ margins.

Energy sector expert Dr Ilyas Fazil, while discussing the mechanism for the fixing of OMC margins, said, “The timely step of OMCs’ margins increase now is the right one to ensure the sustainability of the industry and its ability to continue smooth operations and ensure uninterrupted supply of POL to the consumer as well as to keep the wheels of the national economy running smoothly. It is an important step towards the ease of doing business also.”

He said the pricing of petroleum products was a sensitive issue, especially because the prices were regulated by the government.

In doing so, he said, the government has to strike a delicate balance between the interests of the consumers and that of the downstream sector of the petroleum industry.

Dr Fazil noted that in the absence of price deregulation, OMCs are fully reliant on the margins fixed by the government for their cost recovery.

“The revisions, since 2014, have, however, not been done in a timely annual manner and this has caused considerable hardship to the OMCs,” he further pointed out.

Recalling the history of fixing of oil margins by the government, the IPI fellow said, the Economic Coordination Committee (ECC) of the Cabinet had, for the first time ever on October 29, 2014, linked the increase in the OMC margins to the Consumer Price Index (CPI), with effect from July 1, 2016.

This, he said, was done after detailed deliberations between the Directorate General Oil and the Downstream Oil Industry, to replace the ad hoc manner in which prices were fixed prior to 2014.

The ECC, Dr Fazil said, had then also decided that the margins will be revised annually. The last OMC margin increase was with effect from July 1, 2018. No subsequent raise was given to the industry. For the longer-term, the MoEPD had also decided almost a year ago, to revisit the existing mechanism for determination of the OMCs’ and dealers’ margins “in a holistic manner and devise a revised mechanism for the purpose of ensuring the interests of all stakeholders particularly the consumers,” he recalled.

The said study has yet to be initiated and it is understood that various options of who will carry out the study and at what cost are still being evaluated.

“Carry out a study by all means but ensure the survival of the sector in the interim,” the fellow underlined.

Dr Fazil, in his remarks, said that the cost of doing business for the Downstream Sector has undergone a sea change over the last decade.

The factors impacting the OMCs’ margins, in addition to the overheads and marketing costs, includes costs for 20 days’ stock cover, the OGRA’s requirement of developing 40 MTs of petrol storage per operational retail outlet, and continued devaluation of rupee.

These factors, which significantly raise the investment and capital requirements, must also be taken into account while considering the adequacy or otherwise of the margins increase, he maintained.

“Therefore, albeit delayed, the margin increase proposed by MoEPD is in line with the principle in vogue since 2014. The calculated increase of 16 percent is also in accordance with the CPI change between June 2019 and October 2020,” Dr Fazil concluded.

Copyright Business Recorder, 2021