Oil price rise

On the last day of 2016 - 31st December - Ishaq Dar, the Federal Finance Minister, on behalf of the federal government decided to set the price of petroleum and products every fifteen days instead of once a month, with effectivity on the fifteenth and the first of every month. The decision, as per an official, was made at the suggestion of the Oil Marketing Companies (OMCs) whose reported rationale was to avoid losses as global oil prices rise.
The question is whether this rationale has merit? There is no doubt that the crude oil international prices fluctuate considerably from day to day. Be that as it may, much has been made by Pakistani governments, past as well as the incumbent, of how prices are now deregulated and any fluctuation (fall or rise) in the international price of petroleum and products is simply passed-on to the consumers. This premise is inaccurate as the petroleum and products price setting mechanism in the domestic market guarantees a specified revenue for not only the OMCs, but also the government which has come to rely heavily on this item for its revenue as it is easy to collect - an ease that is attributed to withholding agents crediting the exchequer directly rather than relying on the poorly managed Federal Board of Revenue (FBR) with massive annual leakages estimated at over 500 billion rupees by former finance minister Shaukat Tarin.
The OMCs' margin as determined by the pricing formula dated 1 March 2016 is a whopping 2.35 rupees per litre and the dealers' commission is an additional 3.08 rupees per litre. This is reportedly sufficient to meet their costs as well as a healthy profit margin otherwise it is highly unlikely that any OMC would have remained in business.
The pricing formula includes the following taxes: (i) development levy budgeted to generate 150 billion rupees in the current year while it generated 135 billion rupees the year before; the government has been able to reduce this levy - from 6 rupees per litre to 4 rupees effective 15 to 31 January and then further to 2.25 rupee per litre effective 1 to 15 February 2017 without impacting on the budgeted amount as the quantum of purchase of two products has increased significantly - High Speed Diesel Oil (HSDO) consumption increased from 0.45 million tons per month in 2014-15 to 0.60 million tons in the current year and Ron 92 consumption increased from 0.3 million tons in 2014-15 per month to 0.5 million tons in the current year). And (ii) sales tax which is levied as a percentage of the imported value of the product; however, this implies that when the international prices of petroleum and products are rising (as was the case during the tenure of the PPP led coalition government from 2008-13) total collections under this head would rise while in the event that the price was declining (as has been the case during the ongoing Sharif tenure) total collections would decline. To ensure that the budgeted revenue from this source is realised Ishaq Dar has frequently adjusted sales tax on two main products - HSDO and petrol though briefly - from February to June 2016 a fixed rate was levied on oil and products.
HSDO is used by buses, trucks that transport the poor or lower income earners as well as transport goods thereby raising their price for the common man. Effective 1 September (with the notification issued the day before) sales tax ad valorem on HSDO was a whopping 35.5 percent, well above the threshold of 17 percent sales tax on other items; for October it was raised to 36.5 percent, for November it was reduced to 33 percent, for December it was reduced to 31 percent, from 1 to 15 January it was further reduced to 25.5 percent and from 16 to 31 January it was raised again to 28 percent.
Petrol had a levy of 20 percent ad valorem for September and October 2016 which was reduced to 16.5 percent for November, 14.5 percent for December and the first fifteen days of January 2017 and was raised to 17 percent for 16 to 31 January. Like other actions by the Sharif administration that are clearly non-transparent the notification did not mention the rise in sales tax on petrol.
On 31st January, the government announced an increase in the price of HSDO and petrol -2.26 rupees and 2.25 rupees per litre respectively - though it claimed that it had not raised the sales tax on either of these items. In short, the claim is that the international prices of oil increased during the period under review which compelled the government to pass it on to the consumers. However, what has concerned economists and the general public is that the adjustment has been more than was merited by the fluctuating international price of oil and products.
The following table sourced to the World Bank shows the average of three spot prices: Dated Brent, West Texas Intermediate, and the Dubai Fateh.
The January average was 53.70 dollars per barrel - a rise of 1.8 percent from the December average. On 2nd February, price of crude declined by between 0.34 to 0.64 percent. The reason as per Tim Evans, Citi Futures' energy futures specialist, "Traders seem to have concluded the dispute between the U.S. and Iran over a recent missile test represents more of a war of words than the start of a military confrontation that would put supplies from the wider Persian Gulf at risk." And the planned cut in Opec production that would have raised the price did not take effect because it fuelled US shale gas shares raising concerns in Opec about displacement of oil by shale.
To conclude, the government's reliance on taxing petroleum and products as a source of revenue is considerable and it has manipulated the levy as well as sales tax to ensure that it achieves the budgeted amount. While the Sharif administration has benefited from lower oil prices - around one third of prices that were prevalent during the PPP administration - yet the fiscal space this could have created has been compromised by ever rising reliance on external and domestic debt to fund rising current expenditure. What is even more disturbing is the decision of the government to bring five regulatory authorities, including Ogra, under the administrative control of the relevant Ministry. This may well account for the recent reported instruction by Ishaq Dar to Ogra to calculate the price effective 1 to 15 February on the basis of 31 percent sales tax on HSDO while then claiming that it had rejected the rise in price recommended by Ogra and kept the rate at 28 percent, the same as announced on 31 December.

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Month            Price          Change
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Aug 2016         44.84          1.40 %
Sep 2016         45.06          0.49 %
Oct 2016         49.29          9.39 %
Nov 2016         45.28         -8.14 %
Dec 2016         52.61         16.19 %
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