Petroleum price: PDC makes a comeback

The petroleum price for November 2021 got observers puzzled, as prices remained unchanged, despite the regulator’s summary of substantial increase in both HSD and petrol. The government claimed it had decided to “absorb” the impact, but the notification on Ogra’s website showed identical base price for petrol, with no change in PL and GST. Something had to give. What gave?

It is the Petroleum Differential Claim (PDC) which has made a comeback after more than a decade. For those unaware, it is the amount government settles with refineries and importers at a later stage, ideally when prices cool off. This is not a cash handout to refineries and importers. It increasingly appears reducing the Petroleum Levy further is not an option as reports claim the IMF is insistent on getting as close as possible to the elusive PL target.

So the increase in ex-refinery prices has been compensated with a proportionate appropriation on account of PDL – Rs10.79/ltr for petrol, and Rs7.7/ltr for HSD. The plan is to hope for international crude oil prices to cool off going forward, and then the PDC amount will be added back to the base price. Hope is not a strategy, but faced with mounting pressures from all fronts, and the previous increase in excess of Rs10/ltr, something had to give.

Without the PDC, continuing with existing PL and GST, petrol price for first November fortnight would have been Rs150/ltr. Surely, there is no political capital to take that route. The reference Arab Light crude oil averaged $100/bbl for the period. There are emerging views that oil may well have peaked for now. If that is the case, the opportunity to reverse the PDL could come sooner than later. That said, this cannot go on for longer than, another price revision or two, at best.

The financial impact for the first fortnight works around Rs9-10 billion, assuming average three-month trailing demand. This may not be a substantial number for the likes of government owned PSO but could cause worries for smaller refineries. Only bright side to the story is that new prices have been tested without hurting demand (although reduced smuggling could well be masking that). This gives cushion to the government to levy higher taxes, and reverse the PDC, without necessarily having to feel the urge to reduce retail prices. So next time when you hear of an Ogra’s summary proposing Rs10/ltr decrease in petrol price, don’t go all crazy when the price stays the same.