The pricing of fuel

The focus of this article is on the pricing of liquid fuel, especially petrol and high-speed diesel oil. These are the two key petroleum products and represent 90 percent of the consumption of POL products in the country.

The Middle East war and the closure of the Strait of Hormuz have led to a big escalation in oil prices. The price of Brent crude has gone up from under $71 per barrel to over $96 per barrel. Consequently, there has been a sharp jump also in prices internationally of petrol and HSD.

Domestically, there has been a similar escalation in fuel prices. The price of petrol has jumped up by 34 percent and that of HSD by 35 percent. Therefore, there has been a transfer of international prices into domestic prices of fuel products.

The fundamental issue is the impact of these increases on the overall rate of inflation in Pakistan. The CPI was increasing at 7 percent per annum on February, 2026. It has now exceeded 11 percent in August 2026.

There are two impacts of the rise in fuel prices. The first is the direct impact on the price index. The second is the indirect impact via rise in food prices, especially due to higher transport costs. Combined together, it is estimated that 32 percent of the increase in the rate of inflation from 7 percent to 11.1 percent is due to the big jump in fuel prices.

There is need also to derive the incidence of the increase in fuel prices on the population in different income quintiles. Primarily because of higher food prices, it is estimated that the impact as percent of income on the lowest income quintile is over two times the impact on the top income quintile.

We turn now to the fuel prices in different countries. A comparison is made of the price in US$ per liter in selected large South Asian and East Asian countries. The former countries are India and Bangladesh, while the latter two East Asian countries are Indonesia and Thailand.

The petrol price in Pakistan as of 31st of August was $1.236 per litre. This compares with the price of $1.183 in Bangladesh, $1.134 in India, $0.936 in Indonesia and $1.436 in Thailand. Therefore, the petrol price in Pakistan is higher than the corresponding prices in three out of the four selected countries.

The high-speed diesel oil price was $1.336 per litre in Pakistan as of the 31st of August. The corresponding prices are $0.938 in Bangladesh, $1.037 in India, $1.433 in Indonesia and $1.175 in Thailand. Here again, the price in Pakistan is substantially higher in three out of the four countries. In particular, both fuel prices in Pakistan are higher than either in India or Bangladesh.

There is need also to note that in three countries; namely, Bangladesh, India and Thailand, the diesel price is lower than the gasoline/petrol price. This is in contrast to Pakistan where the diesel price is 8 percent higher than the petrol price.

The issue is that with the above four countries also relying more on oil imports, why there are significant differences in prices.

Therefore, there is need to examine the structure of the prices of petrol and high-speed diesel oil in Pakistan. The government had taken the decision that prices would be announced daily of these two products by OGRA. This has been happening since 21st of July 2026.

There is need to recognize the transparency in information by OGRA related to the price structure of the two fuels. The prices announced as of the 4th of September were Rs 349.00 per litre for petrol and Rs 374.31 per litre for diesel.

The price structure of the two fuels is revealed daily by OGRA.

The total price is broken up as follows:

• Import cost and Freight

• Customs Duty

• Ex-Refinery/Import Price

• Inland Freight Margin + OMC’s Margin + Dealer’s Margin

• Price before the levies

• Petroleum levy

• Climate Support levy

• Total Price

The customs duty is close to 10 percent in the case of petrol and 6 percent on diesel. The three margins combined together are Rs 25.30 per litre on petrol and Rs 21.81 per litre on diesel. The petroleum levy is Rs 80 per litre and the climate support levy is Rs 5 per litre on both products.

OGRA has indicated the full impact of a price revision in seven days. Therefore, it seems more appropriate if the prices are announced not on a daily but on a weekly basis. The average change in price daily of petrol has been only 0.2 percent, whereas, on a weekly basis, it has been 1.2 percent. The less frequent changes in prices will introduce a modicum of perception of stability in the market.

The fundamental questions relate to why the retail prices of fuel products are higher in Pakistan than in Bangladesh or India. All three countries rely more on imports for domestic supplies. Therefore, there is unlikely to be much variation in import prices in US$. The differences arise due to variation in margins and taxes.

This brings us to the controversial levy in Pakistan, the petroleum levy plus the climate support levy of Rs 85 per litre on both products. The petroleum levy was brought in July 2022 at Rs 20 per liter. This was increased to Rs 50 per litre in November 2022 and to Rs 60 per litre in September 2023. There is no sales tax now on the two products.

What was the benefit to the federal government of the introduction of the petroleum levy and move away from sales tax? The former source is treated as non-tax revenue and, therefore, not shareable with the provincial governments, unlike the sales tax which is part of the divisible pool of federal revenues.

Clearly, the introduction of petrol levy has contributed to a big increase in federal revenues. Revenues from the levy have gone up from Rs 579 billion in 2022-23 to as much as Rs 1,567 billion in 2025-26, with an annual growth rate of over 33 percent. This is due to a big increase in the rate of levy per litre.

The fundamental question is what is the rate of petroleum levy plus climate support levy relative to the ex-refinery/import price? It is 35.6 percent in the case of petrol and 31.8 percent in the case of diesel. This is a violation of the principle of substitution of the sales tax at 18 percent by the levy and the need to keep the rate unchanged.

The extent of overstatement of the petroleum levy is as follows:

========================================================                                          (Rs per litre)========================================================            at 18 percent of        Actual    Difference            import/refinery                                         price                                       ========================================================Petrol      42.97                   85.00          42.03Diesel      48.15                   85.00          36.85========================================================

Therefore, there is a strong case for reduction in the price of petrol from Rs 349.00 to Rs 306.97 per liter. This will imply a reduction in price of 12 percent. Similarly, the price of diesel should be brought down from Rs 374.31 per liter to Rs 337.46 per liter, leading to a price reduction of 10 percent.

The US$ equivalent price of petrol will be $1.106 per liter while that of diesel will be $1.215 per liter. This implies that the price of petrol will be close to that in Bangladesh and India. However, the price of diesel will still be relatively high.

The reduction in the retail prices of petrol and diesel will facilitate more economic activity and increase consumption. As such, the fall in the levy rate will lead to a less-than-proportionate drop in revenues. The estimated revenue foregone is between Rs 200 billion and Rs 250 billion. There is significance in the fact that the IMF continues to treat the petroleum levy as a tax. As such, there ought to be support from the IMF for restoring the rate of 18 percent, which was the standard rate when there was a sales tax on petroleum products.

The time has come to limit inflationary pressures by bringing down significantly the level of the petroleum levy plus climate support levy. Also, the policy of daily announcements of prices should be replaced by weekly setting of prices.

Copyright Business Recorder, 2026