EDITORIAL: As per media reports, petrol stocks are reaching a critical level and there is a fear that a shortage may be looming, similar to last summer. Certainly, petrol supply is stretched, but it seems that it is a far cry from the crisis that the country witnessed last summer. The supply is being tested primarily due to three reasons –higher demand (due to growing domestic tourism), lesser smuggling from Iran (due to increasing surveillance on the border) and port congestion due to increased formal supply to catch up with the growing demand. Therefore, it increasingly appears that consumers may not face shortages in the coming weeks; but the government should not even allow the market to begin speculation of any possible shortage. Every Oil Marketing Company (OMC) should keep 20 days of storage by law, and that is usually breached and that enhances undue risk. The capacity of Karachi Port Trust (KPT) is being put to a stern test and the number of functional oil piers is less than what is actually required. The lack of coordination between relevant ministries only exacerbates the issue. The government must work on resolving these port choking issues and must develop and ensure the requisite storage.
It takes about 3 to 4 days for the supply to reach up-north from the Karachi port. Any blockage on this port can cause serious shortage in the north of the country. Then it is also a security issue. In case of a war-like situation, the supply is not adequate to let the private sector operations run and meet the demands of the defence of the country. In July, the OMCs’ volume grew by 16.5 percent year-on-year to 1.9 million tons. The highest growth was in furnace oil (FO) at 54 percent which is due to higher demand of electricity in times of stressed hydel supply and skyrocketing LNG prices. The rule of thumb is that at price higher than 14.5 percent of brent, running power plants on FO is cheaper than LNG. And at 17 percent of brent, diesel is viable. One of the reasons for higher petroleum demand is the rising RLNG prices because of which FO demand by commercial, industrial and power sectors is growing. The other reason for higher demand in July was dry-docking of Engro FSRU. However, the issue remains that the government did not anticipate the price movement in the international market and didn’t order enough petroleum products amid a growing demand. Nonetheless, high speed diesel (HSD) sales fell by 7.1 percent month-on-month. This is likely to grow in August as RLNG prices are rising to new highs.
The real growth is coming in motor spirit (petrol). Its sales are up by 12.5 percent to 808K tons (1098 million litres) in July 21. This is evident by record high domestic tourism in July. Domestic tourism was open while international travel was largely restricted. This is good for domestic tourism and OMC industry but at the same time, it is challenging the domestic infrastructure. Industry insiders are of the opinion that smuggling from Iran is significantly curtailed which has resulted in higher demand from the formal sector. This is appreciated as legal consumption is positive for taxation and overall documentation. But at the same time, it is testing the domestic supply chain. One of the reasons for higher demand is that government is not passing on the impact of higher oil prices to consumers. It is adversely impacting the fiscal balance as government has targeted Rs 610 billion from petroleum levy (PL) which is almost zero now and the collection target is based on Rs 30 per litre both on petrol and diesel. The government should start increasing PL slowly to create the much-need fiscal revenues. Higher prices would have an impact on demand which is not inelastic. This will lower the pressure on imports; it may also ease the currency depreciation pressure. The economy is growing and the overall trade volumes are building along with a growth in petroleum imports. It is only a matter of time before berth occupancy and capacity at Karachi ports reaches a more critical level than the present one.
Copyright Business Recorder, 2021
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