Oil prices, market manipulation and government inaction

Instead of taking action, PTI government rewarded the OMCs 

The sudden decision of PTI government to increase the prices of petroleum products on June 26 surprised many. The government was making the tall claims to take severe action against Oil Marketing Companies (OMCs) in Pakistan including the cancelation of their licenses for creating the artificial petrol crisis in the country. The people were expecting a tough action against the OMCs for creating problems for people. But OMCs were rewarded on June 26.  

There were long queues at the petrol pumps to get petroleum products. As soon as government reduced the prices of diesel and petrol to pass on the impact of falling oil prices in the international markets, some oil companies reduced or stopped the supply of oil. This manipulative move created shortage of oil. 

The Oil and Gas Regulatory Authority  imposed total fine of Rs 40 million  on different oil  marketing companies for creating artificial  shortage of fuel in Pakistan. The companies included Puma Energy, Askar petroleum, BE Energy, Shell Pakistan, Attock Petroleum, Hascol Petroleum, Total Parco Pakistan, and Gas and Oil Limited. These OMCs were not supplying fuel, OGRA said. They have been asked to pay the penalties within 30 days.

People were seen forming long queues at petrol stations across the country and even complained of shortages since the government cut the petrol price on May 31. This shortage persisted till June 26 when the government increased the petrol prices. The shortage ended after the price increase.

This clearly shows that oil marketing companies deliberately created the shortage and manipulate the market to make huge profits. The OMCs were not ready to bear the loss as the result of lower prices. OMCs argued that they purchase oil at higher prices and could't provide oil on lower prices. But the same OMCs never refused to sell cheaper oil on higher prices. They happily sell oil purchased on lower prices on higher prices to make profits. It is really a strange argument. 
The government rhetoric and tall claims failed to end the shortage. So government decided to surrender. It increased the prices of petroleum products to end the shortage. The oil companies restored the supply in the market and make billions in few days. 
According to renowned  economist and columnist Dr Farrukh Saleem, the OMCs made profit of rs 16 billions in one day.
After the increase, the government will continue charging Rs 30 per litre petroleum levy on petrol and diesel, Rs6 per liter on kerosene oil and Rs3 per litre LDO. 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 Rs 30 per liter from Rs 8 per liter in January last year.

The government is charging the maximum taxes and levy to generate revenues. The government can reduce the prices with lowering the taxes and levy to provide relief to people. 

 It is important to see the link between oil shortage and oil prices in the right perspective. After the rollercoaster fall in the international oil prices, Pakistan slashed the oil prices by 33 percent (from Rs 111.59 in March to Rs 74.52 in June). But in one fell swoop, it raised the prices on June 26 by 34 percent. A near-instant resumption of supply after the surge in prices may be sufficient proof that a mafia had created the crisis.

Given the fact that oil is traded in futures markets, what factors could explain the countercyclical behaviour in the domestic and international oil prices requires a detailed explanation from the regulator. Pakistan’s structural problems, such as limited storage capacity and suboptimal refining capacity, are some of the reasons behind Pakistan’s failure to benefit from an unprecedented fall in the oil prices in the international market. A limited refining capacity also means that Pakistan has to buy large quantities of finished products.

Inadequate infrastructure also explains Pakistan’s history of missed opportunities. Pakistan’s disproportionately high dependence on vehicular traffic (tankers) for the transport of oil to upcountry destinations means higher oil prices through higher IFEM (Inland Freight Equalization Margin, which is per liter cost that equals across all Pakistan).

OGRA must answer why the delay in the import of petroleum on the part of OMCs was not noticed immediately because there are specific SOPs, failing which the government must take action. If the OMC are to be believed, the energy ministry stopped imports in April and directed them to lift oil from the local refineries.

It is a classic example that how petroleum ministry, OGRA and OMCs joined hand to mint to exploit the consumers. The people of Pakistan has suffered as the result of incompetence and failure of the ministry of petroleum and OGRA to take timely action. This crisis is the result of the flawed decisions and policies of the present government. It better accept the facts and take action to fix the problem.

                                                                            The Editor