Global markets or local politics: What really determines price of petrol in Pakistan?

Why did petrol prices rise even though prices fell globally? Petrol price should have fallen by Rs9; though govt did not increase taxes or levy
Aug 16, 2022
<p>Pakistan petrol prices are affected on the basis of a calculation by Ogra but ultimate deciders are politicians.</p>

Pakistan petrol prices are affected on the basis of a calculation by Ogra but ultimate deciders are politicians.

World oil has dropped by around $7 a barrel in the past 15 days. At the same time, the Pakistani rupee gained Rs25.96 against the US dollar. Hence, motorists in the country were optimistic that the government would lower the price of petrol – which had shot past the Rs220 psychological barrier in the past six months. Instead, the government decided on Monday evening to jack up the price of the critical fuel by Rs6.72 - dashing all hopes.

The government’s decision drew widespread condemnation, most notably from within the ruling party. Pakistan Muslim League-Nawaz (PML-N) Maryam Nawaz claimed that party supremo Nawaz Sharif too was displeased with the move and that he had even walked out of a party meeting in protest.

This, however, does not explain the logic behind the rise in petrol price – though the calculation performed by the Oil and Gas Regulatory Authority (Ogra) does.

Maryam Nawaz’s claims about Nawaz Sharif’s protest could then only be explained in a wider political context.

How latest petrol prices were calculated

Ogra takes two variables into account when computing the price of petroleum products: the average exchange rate of the Pakistani rupee against the US dollar and the average price of petrol and diesel products on the international market over two weeks.

This two-week average has played a crucial role this time. One can suspect that the ruling party is using the factor carefully to its political advantage.

Thus the latest calculation by Ogra was performed for the period starting on July 28 and ending on August 15.

During this period, the benchmark Brent crude was trading at $101.83 a barrel on July 28 and rose to $103 the next day, but this rise was followed by a sharp drop and on August 15, Brent stood at $95.10 – Brent price shed a total of $6.73 a barrel over this period.

The drop was also reflected in petroleum products yielded by crude. Petrol RON 92 was priced at $108.75 a barrel on July 28 and dropped to $102.68 by August 15 – a decline of $6.07 a barrel.

This means that petrol becomes around Rs9 per liter cheaper on the international market between July 28 and August 15 and the benefit should have been passed on to Pakistani consumers.

However, at the beginning of this period, the value of the US dollar stood at Rs240.42. Although the rupee gained Rs25.96 in the next two weeks, the average exchange rate used by Ogra for its calculation was Rs227.851 per US dollar – far above the current exchange rate of around Rs214.

Consequently, petrol cost more in terms of the Pakistani rupee. Its base price or Pakistan State Oil (PSO) cost of supply – which includes the price on the international market and a 10% regulatory duty – rose by Rs5.59 from Rs191.85 to Rs197.39 per liter.

Before petrol is sold to consumers at filling stations, inland freight equalization margin (IFEM), the commission of oil marketing companies and dealers, and a petroleum levy are also added to the final cost.

The latest Ogra calculation, thus, shows that the IFEM was increased by Rs1.18 from Rs4.66 to Rs5.84.

The cut received by oil marketing companies and dealers remained unchanged, at Rs3.68 and Rs7 respectively even though the government had earlier hinted at agreeing to the demands from these companies to increase their margins.

The government also kept the petroleum levy unchanged at Rs20 per liter.

Moreover, the sales tax on petrol remains at zero.

The increase in petrol price on the account of the rupee depreciation and the hike in IFEM was the only thing passed on to consumers.

Petrol politics?

The government could have explained the above to the general public. Instead, it chose a more discrete path that may help it reach some political goals.

Shortly after the new petroleum prices were announced, Maryam Nawaz tweeted that Nawaz Sharif “strongly opposed” the decision to increase petrol prices saying that he “cannot burden the people with one more penny and if there is any compulsion from the government, I am not involved in this decision.”

Maryam claimed that with these words Nawaz Sharif left the meeting.

On Tuesday, PPP leader Asif Ali Zardari also expressed concerns about the petrol price hike and announced that he will take up the issue with Prime Minister Shehbaz Sharif, SAMAA TV reported.

With the top brass of the ruling coalition coming out against price increase, you can expect the government to revisit its decision by the end of this month.

Is there more to it?

At least 11 National Assembly constituencies go to by-elections in September. Winning these seats is crucial for the government and the Pakistan Democratic Movement (PDM) coalition.

Since the rupee continues to gain against the US dollar and world oil appears to stabilize at around $95 a barrel, petrol will likely become cheaper in the rupee term by September. It already costs less than what it did on July 28.

Ogra is expected to come up with a new calculation on petrol by September 1. if the rupee remains at Rs214 with world oil at $95 a barrel for this period, the base price – or PSO cost of supply - of petrol should climb down to around Rs180 per liter.

The government could easily reduce the petrol price by Rs19 only days before by-elections.

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