ISLAMABAD: In a sudden move, the government notified a record hike in the prices of petroleum products, including petrol and diesel, ranging from 27 per cent to 66pc depending on the product.

The hike is notified with immediate effect.

The step took many by surprise because it was out of schedule and was not prompted by any summary moved by the oil sector regulator, which is the normal procedure.

Most observers agreed that the step has been taken to address ongoing supply chain disruptions that have led to serious shortages in many parts of the country, in large part due to a pricing dispute between the government and the industry.

A senior government official told Dawn that the prices were increased four days ahead of the due date without waiting for a usual summary of the Oil & Gas Regulatory Authority (Ogra) “to immediately pass on the impact of international price hike”. The revised prices will remain effective until July 31.

Effective immediately, increase ranges between 27pc and 66pc

He said the authorities feared that even a minor increase in sales in anticipation of a higher price would dry out petrol pumps across the country as the supply chain was already operating on very thin margins. He said the companies and retailers had already slowed down sales in some parts of the country “for inventory gains” ahead of an anticipated price increase. In their calculus, the price increase would partially offset their past losses, he said.

But a senior source in the oil industry said it might not work out so neatly for the government. “Illegal export of petrol to neighbouring countries will stop for the next week or two,” he told Dawn on condition his name not be used due to the sensitivity of the matter. “Our price was currently cheaper than prevailing pump prices in Afghanistan and India, and some product was being smuggled to those countries as a result of this price difference.

He told Dawn that the industry saw an unusual spike in demand in Peshawar in the month of May, and especially June, and word within the industry was that this demand is coming from buyers who are transporting the oil to Afghanistan for sale. “All that will stop due to the adjustment,” he said.

But the price hike may not subdue the hoarding behaviour the government has alleged is the root cause of the supply chain disruption seen across the country, according to him.

The decision to hike prices was announced by the ministry of finance after consultations with representatives of the petroleum division and International Monetary Fund on the basis of import price provided by state-run Pakistan State Oil which imported five cargoes of petrol and four cargoes of high speed diesel so far during the current month.

“Unless they change the underlying formula, make it more transparent and make more frequent adjustments fortnightly instead of monthly, the hoarding behaviour by some unscrupulous players may well continue,” he said. “They will watch the market to see how international prices change in the next 15 days and decide whether or not they want to offload their inventories or hold on to them in anticipation of another price increase in the near future.”

Based on existing tax rates and PSO’s import cost, the ex-refinery or import parity price was worked out at about Rs45 per litre. The product is mostly used in private transport, small vehicles and two-wheelers. The ex-refinery cost of diesel is now estimated at about Rs43 per litre. HSD is mostly used in heavy transport vehicles and agricultural engines like trucks, buses, tractors, tube wells and threshers etc.

Officials said the total stocks of petrol and diesel on a national level were enough to provide eight days of cover. However, after excluding Sindh where stocks for petrol and diesel stood at 23 and 13 days respectively, stocks in other provinces were still precariously low for almost third month in a row.

They said the petrol stocks in Punjab, Khyber Pakhtunkhwa and Gilgit-Baltistan & AJK were reported for 5-day coverage and for three days in Balochistan. The diesel stocks in Punjab were reported for 7 days, four days in Khyber Pakhtunkhwa, eight days for Balochistan and six days in GB & AJK.

The government is now charging about Rs47 per litre taxes on petrol and high speed diesel as the petroleum levy on both items is now set at a maximum permissible level of Rs30 per liter. The government has already increased the general sales tax (GST) on all petroleum products to a standard rate of 17pc across the board to generate additional revenues. Until January last year, the government was charging 0.5pc GST on light diesel oil (LDO), 2pc on kerosene, 8pc on petrol and 13pc on HSD.

Besides the 17pc GST, the government has almost quadrupled the rate of petroleum levy on HSD and petrol to Rs30 per litre from Rs8 per litre in January last year.

The levy on kerosene and light diesel oil was kept unchanged at Rs6 and Rs3 per litre respectively.

Over the last many months, the government had been increasing petroleum levy rates to partially recoup a major revenue shortfall faced by the FBR. The levy remains in the federal kitty unlike GST that goes to the divisible pool taxes and thus about 57pc share is grabbed by the provinces.

The petrol and HSD are two major products that generate most revenue for the government because of their massive and yet growing consumption in the country.

Published in Dawn, June 27th, 2020