Recent reports indicate that the Oil and Gas Regulatory Authority (Ogra) and the oil industry are advocating for a gradual deregulation of fuel prices. The proposal includes terminating agreements with petroleum dealers and cartage contractors concerning their commissions, enabling the oil industry to autonomously determine their margins based on competitive dynamics.

This potential deregulation of fuel prices in Pakistan marks a significant transformation in the nation’s oil sector. The phased strategy aims to overhaul various elements, spanning from pump prices to governmental functions, with the overarching goal of alleviating political pressures linked to pricing decisions and promoting a more competitive market landscape.

Petrol prices in Pakistan are influenced by numerous factors, both domestically and globally, including fluctuations in international crude oil prices and changes in the value of the Pakistani rupee against the US dollar.

Government taxes and duties constitute a substantial portion of petrol prices, with changes in policies and taxation directly affecting pump prices. Additionally, transportation and distribution costs contribute to petrol prices, with expenses related to fuel prices, infrastructure maintenance, and logistics influencing the final retail price.

This potential deregulation of fuel prices in Pakistan marks a significant transformation in the nation’s oil sector

Deregulation offers the potential to mitigate political influences on pricing mechanisms, fostering competitiveness among oil companies and potentially leading to price reductions in specific regions. Additionally, proponents argue that deregulation could incentivise efficiency enhancements as oil marketing companies (OMCs) adopt more streamlined sourcing methods, as recommended by Ogra.

Persistent concerns revolve around the potential emergence of cartels and monopolies in the absence of robust regulatory oversight. Dealing with cartelisation remains the primary challenge. Strengthening Ogra is essential to ensure competitive market conditions, prevent cartel formation and monopolistic practices, and uphold standards of product quality, quantity, and availability for consumers.

Pakistan’s history of inaction against suspected cartels in essential industries, including accusations of hoarding by OMCs during the 2020 pandemic, raises concerns. The inability of regulatory bodies to effectively tackle these issues in flour mills, sugar refineries, automakers, poultry producers, and cement companies emboldens potential cartels to manipulate prices, unfairly impacting consumers.

Last year, the government announced its intention to implement a ‘bonded warehouse’ policy aimed at addressing dryouts in Pakistan’s petroleum sector. Under this policy, foreign companies are allowed to establish bonded warehouses for oil storage, ensuring a consistent supply of petrol and diesel in major urban centres. Objectives include breaking the monopoly of oil marketing companies, preventing artificial shortages, and discouraging illegal hoarding.

Additionally, the policy simplifies business transactions for foreign suppliers through local banks, reducing the need for letters of credit and alleviating pressure on foreign reserves. This initiative is expected to assist small filling stations and mitigate fuel shortages.

Another significant concern is the potential for price volatility, especially in remote regions, which could have adverse effects on consumers. Proposals suggesting the utilisation of targeted subsidies through the Benazir Income Support Program (BISP) to assist marginalised communities affected by deregulation offer a promising strategy for mitigating price fluctuations.

This focused approach guarantees that subsidies are directed precisely to those societal segments affected by the changes, diverging from the current broad subsidy system, which burdens national finances.

Comparisons with other countries provide valuable insights. Bangladesh takes a middle-ground approach to fuel pricing with a partially deregulated system. The government controls refining but allows some flexibility for private companies in setting retail prices.

While the government has a say in overall costs through benchmark pricing and subsidies, private companies have some wiggle room. This system offers stability and allows targeted help for low-income citizens, but it might limit competition and create bureaucratic hurdles. Overall, Bangladesh prioritises stability and social welfare while slowly opening its oil market to more competition.

India’s deregulated oil market adjusts fuel prices daily based on global crude oil prices and currency exchange rates. State-owned OMCs like Indian Oil Corporation dominate the market, setting final retail prices with some discretion under the guidance of the Petroleum Planning and Analysis Cell.

While this system allows for flexibility, it also brings volatility and challenges to consumers’ budgeting. Government oversight remains through taxes and subsidies. Overall, India’s deregulated system creates a dynamic market but introduces pricing uncertainties.

The United States has a deregulated market with significant private sector involvement. However, it maintains regulations enforced by bodies like the Federal Trade Commission to prevent monopolies.

Considering these factors, several key priorities surface for Pakistan. Safeguarding vulnerable consumers through targeted subsidies or alternative measures is paramount to mitigate the adverse effects of price increases.

Enhancing the capabilities of regulatory bodies like Ogra to efficiently monitor and enforce regulations is vital to curb market manipulation. Opting for a gradual, phased implementation strategy, as endorsed by Ogra, offers a prudent approach to navigating the transition and minimising disruptions.

The writer is the Pro Vice-Chancellor at Dawood University of Engineering and Technology

Published in Dawn, The Business and Finance Weekly, May 13th, 2024