Extraction & POL price fixing

Bottom Line First: Pakistan’s current petroleum pricing mechanism is no longer an energy policy instrument — it is a fiscal extraction tool. High petroleum levies and climate support levies are systematically used to fill fiscal gaps while circumventing the National Finance Commission (NFC) obligation to share revenue with provinces.

This mechanism has a measurable inflationary impact: transport costs rose 27.43 percent year-on-year in September 2026. The burden falls on a middle class and poor population that has already lost its bargaining power.

I. Mechanism’s Essence: A “Technical Cloak” for a Seven-Day Rolling Average

Under the revised mechanism approved in July 2026, the freight on board (FOB) price for Motor Spirit (MS) and High-Speed Diesel (HSD) is determined using a seven-working-day rolling average of Platts Arab Gulf assessments. The Oil and Gas Regulatory Authority (OGRA) publishes ex-depot prices daily without requiring federal government approval for each revision.

However, this “technical” narrative conceals a fundamental fact: 87 percent of Pakistan’s domestic diesel production comes from local refineries, yet pricing follows the “import parity” principle—local refineries are paid as if their product were imported, regardless of actual production costs.

As Petroleum Minister Ali Pervaiz Malik confirmed, around 70 percent of diesel is refined locally, with PARCO operating at full capacity and other refineries at 84-85 percent utilization. This means consumers pay import-parity prices even when international price fluctuations do not fully pass through to actual costs.

II. True Scale of Taxes & Levies

Under the current pricing mechanism, the federal government extracts revenue through three primary tools: Petroleum Levy, Climate Support Levy, and Customs Duty. As of August 2026, per litre of petrol, the Petroleum Levy is Rs. 80.00, Climate Support Levy Rs. 5.00, and Customs Duty Rs. 17.28—with petrol effectively exempted from Sales Tax to deprives provinces of their legitimate constitutional right of sharing it as per Seventh NFC Award formula.

This tax burden is not accidental. Petroleum levy collections exceeded Rs. 1.2 trillion in just nine months of fiscal year (FY) 2025-26 and final collection figure was Rs. 1.57 trillion. The FY2026-27 target for oil and gas receipts is set at Rs. 1.998 trillion, with the Petroleum Levy alone accounting for Rs. 1.677 trillion—nearly 84 percent of total receipts.

Crucially, the federal government resists IMF proposals to replace the petroleum levy with General Sales Tax (GST) precisely because the levy is retained entirely by the federation, whereas GST must be shared with provinces.

As the Petroleum Minister candidly stated, “If an alternative to the petroleum levy is found, the IMF may consider allowing a reduction.”

III. Design of Fiscal Federalism Circumvention

The critical distinction between the petroleum levy and ordinary taxes is that it is “non-divisible revenue”—it does not enter the NFC framework’s provincial sharing pool. Most taxes, such as income tax and sales tax, go into a common pool shared with the provinces, with provinces receiving the larger share. The levy is not a tax in legal terms, so it never enters that pool.

This arrangement is expected to raise around Rs. 1.7 trillion this year—roughly a tenth of everything the Federal Board of Revenue (FBR) is expected to collect, raised from essentially two products. For a government that struggles to collect enough tax elsewhere, this makes the levy one of the few revenues it can count on. That is why governments of every political colour have relied on it.

IV. Inflationary Pass-Through Effects

The pass-through from fuel prices to Pakistan’s inflation is direct and severe. In September 2026, headline inflation was 10.3 percent, but transport sector inflation reached 27.43 percent year-on-year, with urban motor fuel rising 37.73 percent. Petrol and diesel prices remain 50 percent and 45 percent above pre-conflict levels despite recent declines.

The transmission chain is clear: rising fuel costs rising logistics and transport costs rising retail prices for food and daily necessities. The cost of staple food (wheat flour, cooking oil, and pulses) remained 14.2 percent above its level before the Middle East conflict as of October 1, 2026. Wheat flour prices remained 19 percent above pre-conflict levels.

V. Squeeze on Middle Class & Suffocation of the Poor

Pakistan’s middle class faces a “double squeeze”: on one hand, direct fuel expenditure inflates due to high prices; on the other hand, indirect costs such as food, electricity, and transport services rise simultaneously, while real incomes do not grow correspondingly.

For the poor, the situation is more severe. The cost of a basic food basket for a six-member household stood at Rs. 17,300 per month as of October 2026. Gig economy workers illustrate this crisis. Sadaqat Aziz, a 41-year-old Bykea rider in Islamabad, told Arab News: “For example, if we take a Rs. 200 ride, the company gets its 20 percent share”. That leaves us with Rs. 160. “Out of that Rs. 160, around Rs100 goes on petrol. Then we have the [maintenance] expenses of the motorcycle, and we also have to cover our own expenses”, he added. The government’s fuel subsidy programme covers 9 million low-income people, but motorcycle users receive only Rs. 500 per week in discounts.

VI. What Structural Solutions Exist?

The government is considering a Jamaat-e-Islami proposal to gradually reduce the petroleum development levy to Rs. 5-10 per litre while replacing an estimated Rs. 1.45-1.50 trillion annual revenue gap through new taxes, withdrawal of exemptions, expenditure savings and stronger tax enforcement.

The proposal examines higher Federal Excise Duty on luxury imports, an additional surcharge on the largest corporations and ultra-high-income individuals, withdrawal of tax exemptions, and agricultural income taxation.

However, this remains at the consultation stage. The IMF has shown reluctance to allow flexibility in the petroleum levy, viewing it as a key revenue source tied to programme commitments. Officials said the government has already provided around Rs. 129 billion in relief to stabilise prices, financed through reductions in development spending.

The real issue is not the “technical parameters” of the pricing formula, but fiscal motivation. As long as the federal government treats petroleum products as a tool to fill fiscal gaps and circumvent NFC sharing, no pricing mechanism—whether seven-day average, daily adjustment, or “deregulation”—will change the fundamental reality that consumers bear high tax burdens.

Copyright Business Recorder, 2026