The petroleum sector is back in the limelight. The government is shifting to daily pricing at a time when international petroleum-product prices are rising sharply. Dealers are upset because the new mechanism will reduce the inventory gains, they previously earned from price increases.
Another concern is the decline in commercial stocks, which have fallen to around two-thirds—or less—of their levels at the beginning of June. This could result in diesel shortages within a few weeks if both the Strait of Hormuz and Bab el-Mandeb remain closed.
The planning appears to have gone slightly off track.
When the war began, the government had already built-up stocks and was securing supplies from various sources, although at elevated prices. It then introduced austerity measures to reduce consumption. The formula was working. However, when prices began declining following the signing of the MoU, the demand-reduction measures were gradually withdrawn.
What was apparently overlooked was that falling prices, combined with the easing of austerity measures, would generate additional demand—and that is precisely what happened. Average demand in July increased from the planned 21,000 tonnes per day to actual sales of around 25,000 tonnes per day, while imports had been planned at a lower level. In addition, smuggled volumes from Iran have dried up because of the precarious security situation in Balochistan.
There has been a genuine increase in demand, while dealers and other market participants are also purchasing additional volumes to benefit from potential inventory gains as the price outlook turns bullish amid attacks on both sides. As of July 20, domestic stocks had declined to 16 days of petrol supply—23 days including shipments en route—and 21 days of diesel supply, compared with 29 days and 44 days, respectively, on June 1.
This may not sound alarming, as the situation remains under control for the next few weeks. Cargoes are already on their way, and stocks are expected to increase in the coming days. However, the risks will continue to grow unless demand is moderated. The Strait of Hormuz is already closed, and crude oil is now arriving mainly through Bab el-Mandeb, which also faces the threat of closure by the Houthis.
Should that happen, crude-oil imports would decline, reducing domestic production of high-speed diesel, around 70 percent of which is locally refined. The shortfall in petrol, of which only around 30 percent is locally refined, may be easier to cover through imports from Oman and Singapore.
On top of this, dealers have announced an indefinite strike against the introduction of daily pricing and are demanding a return to monthly price revisions. The government and the industry have rejected their demands. The dealers’ position is unreasonable, and a shift towards daily pricing is preferable. They will have to rely primarily on their margin of Rs8 per litre and forgo large inventory gains, but the mechanism will also protect them from inventory losses when prices decline.
Nevertheless, a considerable proportion of the country’s roughly 12,000 petrol pumps could close, creating difficulties for commuters, particularly in smaller towns. The decline in petroleum stocks must also not be treated casually. These are tough times: prices are rising rapidly, and supply constraints could become more severe.
In the broader interest of the economy, the government should therefore consider reintroducing austerity measures to curb petroleum demand and contain the import bill.