The government of Pakistan has agreed to deregulate petroleum product prices as of November 1, 2022. The deregulated market regime is subject to government entities’ lack of supervision and regulation related to the entry of new firms and the price charged. The objective of the Oil and Gas Regulatory Authority (OGRA) is to “foster competition, increase private investment and ownership of the midstream and downstream petroleum industry, protect the public interest while respecting individual rights and provide effective and efficient regulations”. Among the five primary functions of OGRA, one core function is to monitor the prices of petroleum products.
Historically, the government planned to deregulate the oil industry back in 2016 but could not do so. However, in 2022, the federal government drafted the implementation of a deregulation mechanism under the new proposed oil policy effectively. Now the question arises, what insight is behind the deregulation of the oil industry? The people of Pakistan thought stable petroleum prices as an indicator of economic performance, and instability in petroleum prices indicates a worsening economic outlook. The frequent change in the prices of petroleum products affects the government’s goodwill. Moreover, an increase in the frequency—monthly to fortnightly from September 2020—of revising the petroleum prices also impacted a political cost on the government. The deregulated petroleum price signals the public regarding the negligible role of government in shaping petroleum prices.
Sometimes the regulated petroleum price regime does not work efficiently and fails to bring equilibrium to the oil market. It has been experienced that lower prices of petroleum products by the government in June 2020 caused the artificial shortage of supply by the dealer. This shortage forced the government to raise the price of petrol by 25 rupees per litre for the proper functioning of the oil market. This surge in petroleum prices imposed high costs on the consumer and could not provide relief in the regulated regime. The regulated petroleum price widens the fiscal deficit by restraining government revenue. The oil industry of Pakistan is the largest sector that helps collect approximately 1,000 billion rupees per year which counts as 25 percent of the total taxes. However, due to the global surge in Brent oil prices, the government slid down the petroleum levy and sales tax by 17.81 per litre in July 2021 to relieve the consumers. This reduction creates a daily loss of 534 million PKR in government revenue and widens the fiscal deficit, ultimately worsening public financing.
The trade-off between government revenue and subsidy to the consumer is imprecise because it will likely benefit the commercial and industrial consumer, and the poor and the middle-class population relatively less in comparison. The fact is that commercial and industrial consumers together make up about 60 percent of the consumption. The deregulated petroleum price is also subject to fragmenting the uniformity of the country’s in-land freight equalisation margin (IFEM). It implies that prices vary from one city to another and from one oil company to another. For instance, the nearby port consumer would pay Rs1 to Rs5 per litre less than the consumer upcountry in the form of IFEM, depending on the transportation cost. India is taking advantage of the oil price difference due to variations in oil transportation costs; almost a difference of INR15 per litre between New Delhi and Mumbai is in practice.
There is a misconception that liberalising the oil industry would produce higher oil prices for good. In contrast, it is essential to note that consumers respond to higher prices by lowering the demand for petroleum products. According to research, a 10 percent increase in petroleum prices reduces the demand by 2.6 percent in the short and 5.8 percent in the long run. However, suppose inventory holding costs remain in place. In that case, an increase in revenue due to price hikes can be offset by the inventory holding cost, constraining the producer from not raising the prices.
The long-term benefits of deregulation for the consumer are inevitable because new business enters the market and increases the supply of the products, lowering prices due to prevailing competition. The competition is a potential source of innovation (many substitutes) and the introduction of new technology.
Most countries have liberalised their fuel markets. According to the official source of Global Petrol Prices, 60 percent of the countries have liberalised their fuel market. Now Pakistan has agreed to liberalise its fuel market, the objective of deregulation should be to create a conducive environment for competition and achieve lower prices for the consumer. For this purpose, OGRA and the Competition Commission of Pakistan (CCP) must be watchdogs to pass on the benefit to the consumer smoothly. Moreover, the government needs to undertake a step to lower the cost of oil transportation from port to upcountry. For this purpose, oil transport by White Oil Pipeline (WOP) must expand across the country.