Petrol pricing: It’s 2021, get it right

For the umpteenth time, the petrol price revision led to quite a storm. Apart from the usual banter on the “all-time high” there was an added flavor of how the consumers were robbed by the government, acting against the regulator’s summary. The summary has long been the favorite talking point, as the big, bold, and red tickers are flashed on the TV screens every 15 days.

It would be much simpler and make more sense if Ogra were to issue the price summary based on maximum Petroleum Levy limit and standard GST, instead of the prevailing rates. Tax on petroleum is a function of crude oil price in Pakistan – and keeps on changing depending on the government’s capacity to pass on. Here is where a deviation on the higher side leads to much criticism.

Before making the point on what makes petrol price, there is no sympathy for the incumbents, because the very people running the show today, chose the role the opposition is playing today. Taxing petrol was once linked to corruption going higher. That is now biting the very people. It is not that they never knew, they just chose to politicize and are rightly at the receiving end today.

Total tax incidence on petrol today is 15 percent. The average for last five years is 30 percent. The tax incidence at 10.5 percent last month was the lowest in more than five years. The tax on petrol has gone as high as 57 percent only last year in June. This government has had the fortune and misfortune (in no particular order) of levying the highest and lowest tax rates in two years. That is how volatile petroleum tax is.

The last two months have seen the highest base price for petrol in rupee terms, as higher commodity price combines with the weakening rupee. The ex-refinery to Arab light ratio has also increased, as a result of increased import duty on petroleum products, levied in the FY22 budget. Rs10-10.5per liter are the margins on the current base price of Rs95/ltr. If the government were to drop all taxes today, petrol would still be selling at Rs106/ltr. That is how much the equation has changed. Explaining petroleum pricing will never get old, it seems. And for the impact and optics petrol prices have, it is worth repeating.