KARACHI: Executives in refineries and Oil Marketing Companies (OMCs) do not see any instant solution to bring down the local oil prices as Pakistan imports 85 per cent of the crude oil and around 60 per cent of diesel to meet the rising demand.

However, cutting the general sales tax of 15 per cent can bring some relief for the consumers, they said.

General Manager Commercial and Corporate Affairs, Pakistan Refinery Limited (PRL), Aftab Husain said in a country that lacks alternative energy resources petroleum products are the single largest energy source of consumption.

The high level of dependency towards imported raw material i.e. crude oil and distillates, such as Diesel has left the pricing structure at the mercy of International oil and petroleum distillates market price.

He said currently diesel is being imported at an all-time high of $138 per barrel which is equivalent to approximately Rs55 per liter FOB price, against the existing retail prices of Rs47 per liter which can no longer be sustained.

“Therefore, there seems no quick solution to bringing the prices down. The only choice the government has is to gradually increase the prices and allow consumers to absorb the impact in the least reactive manner,” he plainly said.

The OMCs and the oil refineries are presently facing severe criticism of making huge profits. However, the general public is not aware of the fact that the refineries and OMC’s are facing huge liquidity problems as the Price Differential Claim (difference between international and domestic price) of more than Rs20 per liter is not being paid on time, Aftab said.

Consequently, if the present liquidity crisis faced by the OMC’s and the refineries is not addressed, it could lead to supply disruption imminently arising from PDC, he said

He said that the refineries will face shut-down like situation as they would not be in a position to service financial obligations towards the International crude Oil suppliers. On the other hand, the OMCs would also suffer serious financial crunch to procure diesel for the country.

The consumers have to develop means to curtail (under available conditions) the consumption of such high price product. Collectively, this will also assist in reducing the burden on the foreign exchequer. He said in the medium to long-term approach, energy conservation and exploring options for alternate source of energy has to be carried out on war footings. Instead of nervously waiting on lowering oil prices, the end consumers will have to get used to these lofty petroleum prices.

Managing Director Bosicor Pakistan, Mohammed Wasi Khan said pricing of petroleum products in the country is comprised of two major components, the import value and the local part.

The only way remains with us is to bring rationale and efficiency in the local component. Among these two areas could immediately bring some relief. One is capping General Sales Tax (GST) on the petroleum products’ prices at the level when the price of crude oil was $60 per barrel. The GST was charged at 15 per cent when crude oil was $60 per barrel and it is still 15 per cent when the crude oil is now $120 per barrel, Wasi Khan said.

Instead of the Government increases its earning from the GST source with the rising global prices at 15 per cent GST, it should be rationalized and dropped to a level that matches the same revenue for the Government i.e. at 7.5 per cent. This will bring a reduction in the prices of products by about Rs four to five per liter without hurting Government revenue, he added.

The abolishment of Inland Freight charge (IFEM) will bring efficiency in the system and overcharging of freight by the transporters will be eliminated. All deregulated products such as Furnace Oil, LPG, and Jet Fuels etc are already sold all across the country with out the IFEM, he said.

Managing Director Pakistan State Oil (PSO), Mohammad Abdul Aleem said “there is no apparent short cut available to reduce petroleum prices.”

During the last three to four years, crude oil prices have been ramping up on account of increased global demand, speculative buying, production and refining capacity restrictions and geo-political situation, specifically, in the Middle East.

He said in totality, C&F (Cost & Freight) elements represents around 90-92 per cent of landed cost, hence, it would be difficult for any one to avoid this major chunk driven by global prices. On its own, the Government has already further reduced OMCs’ margin from 3.5 to 2.65 per cent effectively by revising the pricing formula.

He said the government, being cognizant of the hardships of people, has been extending subsidies on key products like diesel, so as to provide relief to the end-users. “This solution is not recommended in the long term as we should strive to move towards self sustainability,” Aleem said.

By heavily relying on subsidy country risk also increases which is the worst possible scenario for a country’s development. There should be an affordable price increase and it should come through increase of taxes on alternate fuels like CNG, he said. Due to a significant price gap between petrol and CNG, a motor bike rider is paying more than a car owner who is financially better off than the motor bike rider, he added.

PSO MD said moreover, it is no secret that natural gas prices in Pakistan are well below its realistic replacement value; it is very cheap if it is measured in terms of heating value compared to other comparable petroleum products. Therefore, he said, there is good potential to tax natural gas as a cross subsidy to petroleum products with no net subsidy to the Government on petroleum and natural resources. It is also understood that the tax on natural gas will be minimum on domestic consumer. He suggested that rigorous awareness campaigns should be run for energy conservation and improved efficiency so as to reduce wastage at every level. Daytime saving along with five days a week office concept can be one of the ways to save energy. This would surely reduce consumption to some extent.

Director Equity Broking JS Global Capital, Pakistan Mohammed Sohail said that almost all the oil importing countries are now passing the burden of oil prices to the consumer. And this is one of the reasons of mounting inflation in many countries including Pakistan.

The government can stop increasing or for that matter reducing local oil prices if the government finds a way to bridge Rs100-150 billion subsidy. This can be done by finding new tax avenues or reducing current or defence expenses. Both of this looks difficult if not impossible.

Moreover, he said keeping local oil prices at a substantial discount to international prices can result in smuggling of oil to neighbouring countries.

Director Projects Clover Pakistan Limited Fazal Hussain Akbar said the impact of rising petrol prices is on products directly dependent upon it and on freight and energy, the Government can not influence the price of petrol, it can only mitigate the inflationary consequences of oil mainly on transportation and energy costs.

One knee jerk reaction will be to subsidize the costs of oil but this could be counter productive and will hit back. At present, we do not know How much will be the quantum of these costs thus it is impossible to calculate the amount of subsidy and thus could cause huge budget deficits, reduction in development program and initiating a cycle of economic stagnation.

He said the best option is to spread the impact of the costs over future period by issuing bonds to petroleum product marketing companies or to major transporters like PIA / Railways. These bonds have to be flexible, convertible in international market and attractive enough. These should be offered to oil marketing companies and companies in freight business, which have track record of documentation and have enough cash to invest in these bonds. There is a need to include big consumers of energy and those who are dependent upon freight. There has to be a way where agri products makers can also be brought into the systems.

He said since trucking is the largest component of freight costs and unfortunately, Pakistan does not have a developed trucking industry; this sector is in the hands of individuals with low understanding of finances except for NLC. And these people do not have enough cash surplus to buy bonds; we have to be imaginative to protect truckers from immediate impact of rising costs.

On energy costs, Fazal said there is no short cuts because of the longer installation period required to put up a power plant, even in that case, there is a need to start the work and a need to look aggressively towards alternate energy such as Solar and wind energy.