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BR Research

Petrol prices: How low?

Ever since the oil market tanked last Monday, nearly all economic discourse in Pakistan has been around petrol price
Published March 18, 2020

Ever since the oil market tanked last Monday, nearly all economic discourse in Pakistan has been around petrol prices. Had the oil market meltdown been an isolated event - and not an outcome of a black swan - it would have made all the sense. From the very first day of the oil market crash, economic “experts” were all out demanding a cut in petrol prices, claiming that the oil price crash is a boon for Pakistan’s economy.

The economy part has been covered in detail in this space recently (read: Corona: Thinking beyond panic, published Mar 17, 2020). Let’s attempt to settle some petroleum questions and obsessions here. A big assumption will come in handy; that is, Brent oil to average $32/bbl for the rest of the month. Given the supply and demand dynamics of the oil market -- $32/bbl for the next two weeks - appears a reasonable assumption. This takes the March average to $36/bbl.

Brent in February 2020 had averaged $56/bbl – 55 percent higher than the assumption for March 2020. Assuming no major shift in rupee value, this should translate into a base price of Rs42 per liter for petrol. Add Rs10/ltr on account of dealer commission, OMC margin and Inland Freight Equalization Margin – and the pre-tax petrol rate reaches Rs52/ltr.

Herein comes the most critical element – Petroleum Levy (PL). Recall that the government had opted for higher revenues for March petroleum prices, jacking up the PL to as high as Rs20/ltr. Now, there will surely be a sizeable petrol price reduction in April – even if the government decides to stretch the PL to its limit of Rs30/ltr.

At Rs30/ltr PL, the petrol retail price will reach Rs96 per liter, which includes GST at the standard rate of 17 percent. The government will be within its constitutional rights to have levied these taxes, which in this scenario, will amount to Rs44/ltr (highest ever) – while still announcing a sizeable 14 percent month-on-month reduction in petrol price.

In terms of CPI impact, year-on-year considerations come into play, and a PL of Rs27/ltr will be enough to reduce the price by 17 percent month-on-month and have prices at similar level on year-on-year basis. Even in this case, the total tax incidence at Rs40/ltr will be the highest ever monthly tax incidence.

Recall that Pakistan is likely to have already achieved the PL collection target by end of 9MFY20. There is ample room for the benefit to be passed on, which could arguably be better than a few extra bucks made, as the impact on inflation is apparently bigger than that on revenues (see: Higher PL: Penny wise – pound foolish?, published March 6, 2020).  What could come in way of the complete  benefit being passed-on to the consumers, is an expected slowdown in petroleum demand, in the aftermath of Corona.

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