THE danger of an imminent fuel shortage in the country is low since petrol and diesel stocks are well above the mandatory 20-day supplies. But the current economic situation will create major risks for the fuel supply chain if the factors impeding POL import aren’t tackled urgently. The multiple challenges that threaten to disrupt fuel supply include the foreign exchange crunch and the inability of oil firms to open LCs — this is in addition to their difficulty in getting LC confirmation from foreign banks after Pakistan’s credit rating was downgraded. The same applies to refineries for the procurement of crude oil; it has resulted in delays in shipment and reduced throughput of refineries. Moreover, the steep currency depreciation means large exchange rate losses for oil companies due to lower product pricing. On top of that, the hike in interest rates means higher costs of financing their stocks. Hence, warnings of a major fuel supply disruption have been communicated by oil marketing companies and refineries to the government and the central bank.

There can be no dispute that the exchange rate depreciation is resulting in large losses to OMCs and refineries. Although there is a mechanism of loss recovery through pricing, the government is not implementing it, in order to keep domestic fuel prices lower than their actual rates for political reasons. It is trying to stagger this loss recovery, and the effects are now showing on the cash flow situation of the OMCs and refineries. No wonder, OMCs are reluctant to import fuel because of the anticipated losses. Likewise, the increase in the interest rate to 20pc is putting pressure on their fixed inland freight equalisation margin. According to official estimates, the domestic fuel demand is on the lower side. However, these official estimates are debatable because they don’t take into account the rampant petrol and diesel smuggling from Iran. With the wheat harvest approaching, the demand for diesel will shoot up over the next several weeks, putting pressure on the supply chain. The oil industry has been operating in dire circumstances for the last six months, with the government deluding itself that everything is under control. Such situations in countries like Pakistan don’t take long to change for the worse. Poor management and incompetence at the official level will not help prevent the eventuality of massive fuel supply disruptions in the coming weeks.

Published in Dawn, March 9th, 2023