Deregulating the oil sector: Business circles in the oil sector have been lobbying for deregulating the oil sector, arguing that it would be more efficient and would bring down prices. Generally and broadly speaking, deregulation and privatization are required to spur economic efficiency and growth. The claim has been contested by user groups who are sceptical about the claimed prospects of price reduction. Fixing price ceiling in the manner of a number of jurisdictions may be an antidote to price manipulation.
Performance and price behavior in other unregulated sector do not provide supporting evidence in support of the oil businessmen’s claim. Maintaining a sustained oil supply system in a highly fragmented market brought about by deregulation may be a nightmare. Supply irregularities may create market manipulation. It is a large market of 12-20 billion USD. When most reputed international oil companies have gone out or are on the verge of going out, it would be highly risky to entrust such a large and strategic sector to a group of small and inexperienced companies.
On the other hand, most oil refineries are entering into distribution and marketing. These are no small companies and have large stakes in the sector. They have a 50% market share. It is argued that with PSO (Pakistan State Oil) around along with a number of refineries may be able to sustain a viable oil supply system. However, one of the major constraints in deregulating oil sector is the uniform price regime being practised in the country. Deregulation may make oil prices in southern parts cheaper and in northern areas petroleum products may become dearer by Rs 10.0 at least. With so many political and economic challenges, governments may be averse to add new ones. A classical example is India where such regional price differences exist. The reader is referred to an earlier article on the subject in this very newspaper.
Petroleum products pricing: Pakistan has a large poor population which cannot afford high petroleum prices. Ways and means are to be found to subsidise oil prices for the poor and the lower-middle classes. There are two methods: direct and indirect subsidies. Direct targeted and cash subsidies may be feasible for food products. In the energy sector, cross-subsidies may work better. In the case of petroleum, product differentiation can enable to funnel these subsidies.
Even in the advanced and rich countries, there is a price differentiation between diesel and gasoline prices through heavier taxation on gasoline and lower taxation on diesel. In Pakistan also, this used to be the case, but later due to the opposition of environmental lobby led by IFIs (International Financial Institutions), almost uniform taxation has been adopted by Pakistan’s policymakers. Amazingly, differential taxation and pricing continue to be the case in Europe, Japan and Australia. Desulfurization campaign of both diesel and gasoline has reduced the environmental rationale. However, the public goods argument for lower diesel prices continues to be relevant. Diesel is used in goods and public transportation; buses, trucks, trains and other larger vehicles.
Two steps are required in bringing change in petroleum pricing policy; lesser taxation on diesel; and 2. product and price differentiation within gasoline. Apart from promoting social welfare, diesel price support would encourage public transportation causing reduction in oil consumption. It is simpler to implement once a modicum of price and economic stability is obtained.
The second option of price differentiation within gaso line can be brought by introducing low-octane gasoline for the motor-cycles and even older and smaller used cars of carburetor design. These are used by the lower-middle classes and even the poor. Such fuels are cheaper to blend and enable application of lower taxation. This proposal has been lobbied by many experts but somehow there has been hesitation among policy circles on it.
To conclude, oil is a sunset industry being phased out around 2050, although not completely. However, its dominance will certainly go away. Looking for alternative resources in the meantime and managing the transition would be difficult, more so for the developing countries like Pakistan. It may be vital to start working in that direction than being caught in a situation for which we may not be prepared for.
Pakistan’s economy and social conditions are facing many challenges. The reasons are policy inertia, pessimism and fear of the new avenues and solutions, etc. This has opposed innovation and productivity increase. Let us break this closed cycle. There is a tendency in policy circles in Pakistan to reject small solutions and looking for large immediate Goliath solutions. There aren’t any. Small solutions add up to a big whole. Even bigger ones take time to implement and get market acceptance.
Copyright Business Recorder, 2022