Petroleum pricing: Tough times ahead

17 Nov, 2022

As international crude oil prices gained momentum in the first two weeks of November, observers in Pakistan expected petroleum prices to be revised upwards. Recall that the government had reached the maximum allowed limit on Petroleum Levy (PL) last month, leaving little room but to increase taxes, either via revised upper limit on PL or reintroduction of GST – in case of a sizeable increase in oil prices.

And the increase of 7 percent over the previous fortnight was the biggest since June 2022. The reference Arab Light crude price in PKR terms went up by nearly 8 percent over previous fortnight to Rs135/ltr – highest in five fortnights. Yet, the retail price stayed unchanged, without having to compromise on Petroleum Levy. What gave?

The base price for gasoline actually went down by 1.3 percent over previous fortnight to Rs162.3/ltr, despite 8 percent increase in reference crude price in rupee terms. It so happened that the refining premium came closer to the long-term mean, having stayed unusually high since June 2022. The base price to international crude price ratio came back to 1.2, down from an average of 1.3 in the last four months. Had the recent premium on gasoline continued for the fortnight – the retail price would have gone up by Rs15/ltr, without altering the existing PL.

While the government has enough cushion on petroleum front, the real issue lies with diesel, as the government struggles to increase levy, as earlier agreed with the IMF. The average PL on HSD for FY23, with the IMF is agreed at Rs32/ltr. The current rate is Rs12/ltr, and there are still four months to reach the maximum PL of Rs50/ltr. That said, the average will stay shy of Rs32/ltr, unless the PL goes up to the maximum in the next two months.

The challenge on the HSD front does not get any easier, as the diesel spread over crude, jet fuel and other variants is currently the highest in over 17 years. For achieving the agreed upon PL target on HSD, the retail prices will eventually have to go up, barring exceptional circumstances. It will always be a tough call, but delaying the inevitable may only adds to troubles with the IMF (and revenue target).

The chances of oil prices coming down to such low levels that will allow government to increase PL without having to revise pump prices, are slim – at least in the near future. Also recall that the relevant forum has okayed an increase in the profit margins for Oil Marketing Companies by Rs2.3/ltr of 63 percent. Keeping pump prices in check with increased revenue needs will not be an easy task.

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