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Crude oil averaged $66/bbl in the second half of FY21. The Petroleum Levy averaged Rs14/ltr during that period. The finance minister in his post budget conference pinned his hopes of crude oil averaging $66-68/bbl. The hopes are pinned on Iranian oil coming back into the market, in a likely event of US sanctions being lifted. Experts around the world see oil averaging higher than current rate, let alone the FY21 average.

How will the scenario fit in with government’s rather lofty PL target for FY22? Recall that FY21 PL target at Rs450 billion was met with similar skepticism, but the government has managed to almost achieve it. All thanks to significantly low oil prices for much of 1HFY21. As Shaukat Tarin reiterated the government’s desire to not increase retail price, one wonders what is the Rs610 PL target for the upcoming fiscal year based on.

It is worth re-plugging the chart from last week, showing petroleum price sensitivity (read: Petroleum Sensitivity: Getting tougher, published June 8, 2021). Consider this. If petroleum consumption remains the same next year at the highest ever level, even Rs30/ltr of PL would not lead to achieving the target. Nothing short of a 10 percent increase in petroleum consumption would help achieving the yearly target.

It gets more interesting here as petroleum consumption has been found rather elastic over the years. Any significant price increase invariably leads to lower petroleum consumption (read: GDP, inflation, and petroleum pricing, published June 10, 2021). Given the inflation target of 8 percent for FY22, average petrol price of Rs120/ltr will need oil to average $60/mmbtu for PL collection to max out at Rs30/ltr. Don’t forget the price and demand relationship – and any hopes of getting even close to the target will fade away.

To cut it short, the PL target is highly unrealistic, bordering on the impossible, and could well be short by Rs150 billion by the year end. And the FY22 PL target is not even the most unrealistic bit from the budget document. That honor goes to the FY21 revised PL collection, which the budget makers have somehow managed to put at Rs500 billion.

Revised estimates can be off by a few points – given a month of revenue realization remaining. But PL collection for 11 months has already been locked, and that for June’s first fortnight is at the lowest ever level. Even if one assumes the government will suddenly alter its policy come June 16, 2021, raise the PL from Rs5/ltr to Rs30/ltr for 15 days, and petroleum consumption matches the highest monthly consumption – the full year PL collection will be Rs440 billion. How have the extra Rs60 billion made the way to the revised figures is a question worth asking. Fiscal slippages are in order, for this year and the next.

The finance minister has been quoting Saudi deferred oil facility that has almost been finalized in response to the question of raising petroleum prices. Balance of payment support, yes. But how exactly would deferred oil payment help manage the price at home will perhaps best be answered by Tarin himself.


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