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The country is facing a severe balance of payment crisis. With drying external sources to reroll maturing debt, it is of utmost importance to preserve the remaining reserves. That must be done by restricting imports. So far, half-hearted measures have been taken in this direction — such as symbolically banning luxury goods in May 2022.

However, the real problem was not only ignored, but the crisis exacerbated after the new government failingly tried to eliminate load shedding by importing fuel at dangerously high prices. Moreover, there was a delay in passing the increase in international prices on to the consumers with a view to saving the political capital. Unfortunately, not only the crisis worsened, but the political capital eroded as well.

Oil marketing companies and refineries have built reserves of petroleum products — petrol, diesel, and furnace oil — at a time of peaking prices in dollars. Instead, it should have been time for rationing and prudence. However, the obsession of showing speed by the government, and motivation to make capital gains by oil companies and dealers have worsened the crisis. The decisions taken in May and June are hurting in July. High imports in May and June have resulted in high payments pressure in July (as payments are made with a lag of 30-60 days) resulting in massive depreciation of currency.

All these steps were taken against the will of the incumbent finance minister, and today he is being bashed by friends and foes alike for not managing the economy right. Those who are responsible for this incompetence should be held accountable. Not the finance minister whose wings have been clipped and who is barred from taking tough but much-needed decisions.

Today, stocks of diesel in the country are of 55-60 days and petrol’s for 35-40. Then there are 35 days of furnace oil stocks with OMCs (oil marketing companies) while there are additional 20-25 days stocks lying with the IPPs (Independent Power Producers). Now when the international prices are falling, the import of petroleum products and crude has declined. But the damage is already done.

Earlier, every sane analyst had insisted that the GoP should take steps towards energy demand rationing by reducing working hours of the week, promoting work from home culture, reducing petroleum consumption by increasing prices; and by doing forced load shedding. Instead, the government was adamant to increase working hours, reluctant to increase prices; and it imported LNG and oil at peaking prices to reduce load shedding. Now the chickens have come home to roost.

Some would argue that freezing of petroleum prices was done by the outgoing PTI government. Yes, it all may have very well started from the decision taken by Imran Khan in February 2022, but that price freeze remained in place till June end. By the time PTI government was ousted, the price freeze had turned into a subsidy. Nevertheless, the new government took another six weeks to start increasing prices. By that time, international petrol and diesel prices skyrocketed.

In May, everyone had expected an increase of Rs50-100/liter in diesel prices. Dealers kept on building inventories in anticipation. Since diesel is less inflammable as compared to petrol, it is also easier to store. Anyone with storage and cash started piling inventories. Seeing that, OMCs increased their import to meet demand from dealers.

Then the refineries pounced upon the opportunity to make quick bucks. The increase in petrol and diesel prices was disproportionately higher than crude oil prices. The difference was refinery margins. These margins swelled. Seeing that, refineries have imported higher amount of crude to process at peaking margins.

In the refining process, furnace oil (FO) is produced, as a by-product, by Pakistan’s dated refineries. There is no or little market of FO export. And the country’s FO reserves are building. Now with increase in hydel production (which is seasonal) and fall in demand (again seasonal), the demand for FO will fall. This may push refineries to produce less in coming months or the government must run furnace oil plants against the merit order allowing refineries to produce petrol and diesel. This will create another crisis.

As the incumbent finance minister has insisted in the past, there may not be any element of corruption. But it’s sheer incompetence on the part of both PTI and incumbent governments. On more than one occasion, the petroleum ministry demonstrated extreme lack of foresight. And the Prime Minister’s office refused to appreciate the gravity of matter at hand.

Back in summer 2020, a commission was formed when shortage of petroleum products took place, as oil companies had not imported enough in days of falling prices. Shouldn’t a commission be formed today when oil companies have imported in excess in days of growing prices? And especially, at a time, when every imported dollar counts?

Copyright Business Recorder, 2022

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar

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Razi-ur-Rahman Aug 01, 2022 10:39am
Dear Ali Khizar Sb, My understanding is that under a directive initiated by Mr. Nadeem Babar, the then advisor to PM in PTI government, the refineries has amended their refining process. Essentially, the imported crude specs have been changed. With the result that now FO is being produced in lower quantities. Country is now more dependent on imported FO then it used to be previously. The situation has to be assessed keeping this fact in mind.
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SAMIR SARDANA Aug 01, 2022 11:47am
Should Pakistan hold 60 days of diesel stocks ? Part 1 Should a nation of 220 million,close to the Persian Gulf,hold 60 days of diesel In the last 75 years,how many instances of shipment delays,have taken place from the Persian Gulf to Port Qasim ? Let us rephrase - How many days of imported diesel stocks Should Pakistan ? Imported diesel is an option to refining diesel - and so,if a parcel is coming at a set frequency - irrespective f lead time - 2 weeks stock is enough In other words, if diesel comes from the Moon or from Saudis, and the lead time in transit is 45 days or 7 days - that has NO IMPACT ON THE INVENTORY NEED - as the inventory is based on VARIABILITY IN LEAD TIME,and NOT the lead time,per se.That is the BASE STOCK, The safety stock is like a SPR - and based on statistical trends of DISRUPTIONS IN IMPORT CHAIN AND DOMESTIC DEMAND.dindooohindoo
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SAMIR SARDANA Aug 01, 2022 11:48am
Should Pakistan hold 60 days of diesel stocks ? Part 2 As far as REFINED DIESEL STOCKS ARE CONCERNED - they are contingent on the CRUDE OIL STOCKS AND SPR.IF THERE IS NO SPR OR ENOUGH STORAGE FACILITY - THEN THE CRUDE HAS TO BE REFINED ASAP - AND PUMPED OUT - AS IT WILL ALSO REDUCE REDUCE REFINING COSTS (AT HIGHEST PLF).SO REFINED DIESEL STOCK. IS A PROXY TO CRUDE OIL PURCHASE.STRAGEM SO THE ISSUE IS WHETHER TO RUN REFINERIES AT MAX CAPACITY (PLF),AND THUS REFINE AT MAX THROUGHPUT,OR STRATEGICALLY KEEP SOME CRUDE AND SPR STOCK, LOWER CAPACITY OF REFINERS AND THEN PLAN CAPACITY USAGE, BASED ON EXPECTATIONS OF DIESEL AND PETROL PRICES IN THE GULF (FOR IMPORTAGE - IN CASES GLOBAL PRICES DIP - BEYOND A BAND) HENCE,INVENTORIES ARE A PART OF THE STRATEGIC SOURCING AND PRODUCTION PLANNING PARADIGM DESIGNED TO MAXIMISE PROFIT - AT THE LOWEST FINANCIAL RISK.SO THE FINANCIAL AND OPPORTUNITY COST OF INVENTORIES HAS TO BE SEEN IN LIGHT OF PPIC GAINS AND STRATEGIC PROCUREMENT.
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Abdullah Aug 01, 2022 12:21pm
This is very much the negative of having a fixed price system. Wholesalers (or what we call middlemen) do the same and make massive profits. The solution is bringing in competition and letting the price float/be free to be determined by the market to some extent.
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Hassan Aug 02, 2022 12:16am
I don't understand why nobody is talking about the massive, roughly $5 Billion USD a year we spend on importing UNECESSARY cooking oil (3.6 billion USD!!), tea, coffee, creamer and sugar?? We can live without oily and fried foods, soft drinks and super sweet tea and coffee. We have a native industry for oil, but we import more because we are like spoilt children that demand handis dripping in heart attack cooking oil, while we have the highest diabetes rates in the world. Why is no politician addressing this massive dollar spend?
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