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Will low oil prices sustain?

New price of gasoline is 230.24 Rs/liter (7.44% decrease) and diesel’s is 236 Rs/L (14.66% decrease). Gasoline’s price has been reduced by 18.5 Rs/L and HSD’s by 40.54 Rs/L. Pakistan oil pricing is complicated under falling exchange rate and the International Monetary Fund (IMF) dictates and requirements of heavy taxation on oil and government of Pakistan (GoP). Prices in Pakistan are now lower than those of India; gasoline’s 16.5% lower and diesel’s 4.5% lower. What could be the future like? Will Pakistan oil prices be maintained or will go up or come down in future? Will international oil prices go down further in the coming days? Will exchange rate of Pakistan improve? Can the IMF conditions be implemented without damaging socio-political conditions? We will discuss the issues and possibilities in the following paragraphs.

No GST has been charged and a nominal petroleum levy of Rs 10/L has been imposed on gasoline and of Rs 5/L on diesel. The price reduction has been made in the background of a 20% reduction in Brent Crude oil prices. The question is: will Brent go down any further and how much? It is a million dollar question. The Russia-Ukraine war may bring it down further. Recession is being projected worldwide which may push the prices down. It is a double-edged sword. Recession may cause loss of exports and remittances.

The most important question for Pakistan is how to meet the IMF conditions vis-à-vis oil prices. This time a combination of lee-ways has brought good news and possible political advantages to the reigning government. What will happen next? The IMF has prescribed full GST of 17.0% and Petroleum Levy of up to Rs 50/L and the change to be implemented gradually in the current budgetary year.

To explore some of the aforementioned issues, we have played with two scenarios. Scenario-I: with prevailing prices and exchange rate and IMF requirements of 17.0% GST and Rs.30.0 PLD and 2. Scenario-II: At reduced Brent crude oil price of 80-85 USD/bbl, Rs 185 exchange eate, Rs 30 PLD/L and GST of Rs 30.67/L. Scenario-I gives a gasoline price of Rs 293.8/L and HSD price of Rs 320.6/L; these would be almost impossible and unaffordable prices. However, under better international price environment under Scenario-II, gasoline price would come out to be Rs 206/L and HSD’s would be Rs 209/L. These are Rs 30/L lower than the existing new prices. It would be possible, if exchange rate is brought down to Rs 185, and more realistic import prices of gasoline and HSD of USD 100/bbl emerge. This would be an all positive scenario; a low exchange rate and lower import prices. However, this may make the full GST and PLD application possible. If the economy and exports improve, exchange rate will improve. This may be the only leverage, Pakistan policymakers have.

Apart from a cost-plus formula, one may ask an innovative question: what is the legitimate oil price that can be charged to consumers? We could define the word ‘legitimate’ to be the comparative prices elsewhere-India and Bangladesh and a maxima of the US prices. US prices are the most efficient and moderate among the advanced countries. The adjoining table gives price data on most relevant possible countries.

Pakistan oil prices in USD terms are: gasoline 1.096 USD/L and HSD 1.124USD/L. Bangladesh prices are the lowest in the region: Gasoline 0.95 USD/L and HSD 0.854 USD/L; India has the highest prices in the region: gasoline 1.311 USD/L and HSD 1.176 USD/L. It may be noted that gasoline prices in Pakistan still are 16.4% lower than those in India while HSD prices are 4.4% lower. The US prices of gasoline and HSD are, 1.298 USD/L and 1.471 USD/L, respectively. We have examined elsewhere, as to why HSD prices are internationally very high these days.

Looking at these, 1.00-1.2 USD per liter appears to be the right price; in between India and Bangladesh. This actually is in the range of current Pakistan prices (1.096 USD/L for gasoline and 1.124 USD/L for HSD). But it is without GST and some PLD. It is clear that IMF dictates will be partly feasible only if international prices go down further and if the exchange rates come down to under Rs 185.

Will the IMF allow petroleum price subsidy to keep the prices low while still charging GST and Petroleum Levy? This would be too clever by half. Taking with one hand and giving with the other. This did not work with the previous government and the IMF programme had to be put off. However, the IMF may allow targeted subsidies for the poor. Direct transfer to poor consumers’ accounts or special petrol versions for motorcycles, for example. Local oil prices can be tinkered with, here and there, reducing local crude prices formula, more efficient buying of imported crude and finished products, reducing or removing custom duties on imported crude and fuel.

(The writer is former Member Energy, Planning Commission and author

of several books on the energy sector)

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Comparative Oil Prices in selected countries-June 27-July 11-15 2022

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Gasoline Diesel Gasoline Diesel

June 27 th 2022 July 11-15th 2022

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Pakistan 1.219 1.356 1.096 1.124

India 1.317 1.182 1.311 1.176

SriLanka 1.528 1.278 1.525 1.276

Bangladesh 0.953 0.856 0.95 0.854

Vietnam 1.44 1.303 1.298 1.15

Philipines 1.565 1.624 1.54 1.565

Thailand 1.517 0.993 1.323 0.963

China 1.45 1.307 1.405 1.261

Turkey 1.643 1.654 1.456 1.54

Spain 2.216 2.188 2.045 1.984

Italy 2.184 2.148 2.037 1.994

USA 1.371 1.511 1.298 1.471

Pakistan Rs/L 248.74 276.54 230.24 236

% delta 6.349 5.0245 -7.44 -14.66

Pakistan Exchange Rate Rs/USD 204 204

Pakistan Exc.Rate-15th july 210

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Source: Global Petroleum Prices, Shell

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Petroleum Products Cost Structure-15th July

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Gasoline HSD Kerosene

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Ex-Refinery Price Build up

———————————————————-

FOB (USD/bbl) 120.78 149.19 136.38

Premium (USD/bbl) 16.12 8.5 5.09

C&F (USD/bbl) 136.9 157.69 141.47

Exch.Rate Rs/USD 209.75 209.75 206.91

Liters/bbl 159 159 159

C&F Rs/L 180.6 208.0 184.1

Incidental-Rs/L 0.3 0.32 0

Custom Duty-Rs/L 20.44 23.51 0

Adjustments-Rs/L 4.77 -2.24 0

Ex-Refinery Price-Rs/L 206.1 229.6 184.1

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Distribution Cost

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IFEM 5.39 -6.85 5.64

211.5 222.8 189.7

OMC Margin 3.68 3.68 1.58

Dealer Margin 4.9 4.13

Petroleum Levy 10 5 0

Price before Sales Tax 230.1 235.6 191.3

Sales Tax-% 0 0 0

Sales Tax-Rs/L 0.00 0.00 0.00

Max Depot Sales Price 230.1 235.6 191.3

Refinery Margin 20 20

Projected Brent Crude Prices 100.78 129.19

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Source: OGRA, Oil Refineries, others

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Petroleum Products Cost Structure-15th July

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Low Crude+ST+PLD Scenario

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Gasoline HSD Kerosene

============================================================

Ex-Refinery Price Build up

————————————————————

FOB (USD/bbl) 100 110 100

Premium (USD/bbl) 8.5 5.5 5.09

C&F (USD/bbl) 108.5 115.5 105.09

Exch.Rate Rs/USD 185 185 185

Liters/bbl 159 159 159

C&F Rs/L 126.2 134.4 122.3

Incidental-Rs/L 0.3 0.32 0

Custom Duty-Rs/L 0 0 0

Adjustments-Rs/L 4.77 0 0

Ex-Refinery Price-Rs/L 131.3 134.7 122.3

————————————————————

Distribution Cost

————————————————————

IFEM 5.39 5.39 5.64

136.7 140.1 127.9

OMC Margin 3.68 3.68 1.58

Dealer Margin 4.9 4.13 0

Petroleum Levy 30 30 0

Price before Sales Tax 175.3 177.9 129.5

Sales Tax-% 17.5 17.5 0

Sales Tax-Rs/L 30.67 31.13 0.00

Max Depot Sales Price 206.0 209.0 129.5

Refinery Margin 20 25

Projected Brent Crude Prices 80 85

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Source:OGRA,Oil Refineries,others

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===========================================================

Petroleum Products Cost Structure-15th July

===========================================================

IMF Scenario at prevailing price and exchange rates

===========================================================

Gasoline HSD Kerosene

===========================================================

Ex-Refinery Price Build up

———————————————————–

FOB (USD/bbl) 120.78 149.19 136.38

Premium (USD/bbl) 16.12 8.5 5.09

C&F (USD/bbl) 136.9 157.69 141.47

Exch.Rate Rs/USD 209.75 209.75 206.91

Liters/bbl 159 159 159

C&F Rs/L 180.6 208.0 184.1

Incidental-Rs/L 0.3 0.32 0

Custom Duty-Rs/L 20.44 23.51 0

Adjustments-Rs/L 4.77 -2.24 0

Ex-Refinery Price-Rs/L 206.1 229.6 184.1

———————————————————–

Distribution Cost

———————————————————–

IFEM 5.39 5.39 5.64

211.5 235.0 189.7

OMC Margin 3.68 3.68 1.58

Dealer Margin 4.9 4.13

Petroleum Levy 30 30 0

Price before Sales Tax 250.1 272.8 191.3

Sales Tax-% 17.5 17.5 0

Sales Tax-Rs/L 43.76 47.74 0.00

Max Depot Sales Price 293.8 320.6 191.3

Refinery Margin 20 20

Projected Brent Crude Prices 100.78 129.19

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Source: OGRA, Oil Refineries,others

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India Petroleum Price Structure

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Gasoline Diesel

—————————————————————————————————

Crude Oil-Average 50 50

OMC Processing Cost 7.35 8.15

Central Excise Duty+Road Tax 19.9 15.8

Petrol Pump Commission 3.8 2.6

VAT (DElhi) 15.67 13.07

VAT (Mumbai) 30 20

Retail Price_Mumbai 111.35 97.28

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Source:https://www.mycarhelpline.com/index.php?option=com_latestnews&view=detail&n_id=417&Itemid=10

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Petroleum Products Cost Structure-15th July

=========================================================

Low Crude+ST+PLD Scenario

=========================================================

Gasoline HSD Kerosene

=========================================================

Ex-Refinery Price Build up

———————————————————

FOB (USD/bbl) 100 110 100

Premium (USD/bbl) 8.5 5.5 5.09

C&F (USD/bbl) 108.5 115.5 105.09

Exch.Rate Rs/USD 185 185 185

Liters/bbl 159 159 159

C&F Rs/L 126.2 134.4 122.3

Incidental-Rs/L 0.3 0.32 0

Custom Duty-Rs/L 0 0 0

Adjustments-Rs/L 4.77 0 0

Ex-Refinery Price-Rs/L 131.3 134.7 122.3

———————————————————

Distribution Cost

———————————————————

IFEM 5.39 5.39 5.64

136.7 140.1 127.9

OMC Margin 3.68 3.68 1.58

Dealer Margin 4.9 4.13 0

Petroleum Levy 10 5 0

Price before Sales Tax 155.3 152.9 129.5

Sales Tax-% 17.5 17.5 0

Sales Tax-Rs/L 27.17 26.76 0.00

Max Depot Sales Price 182.5 179.7 129.5

Refinery Margin 20 25

Projected Brent Crude Prices 80 85

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Source: OGRA, Oil Refineries, others

Syed Akhtar Ali, "Will low oil prices sustain?," Business recorder. 2022-07-27.
Keywords: Economics , Oil prices , Monetary fund , International price , Sales tax , Pakistan , India , China , Turkey , Philipines , Bangladesh , Italy , Srilanka , GST , IMF , US , USD

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