Changing the petroleum pricing structure

Source: http://dawn.com/2008/04/07/ebr12.htm

By Tariq Ahmed Saeedi

While high international oil price impact its domestic price, the local consumers can be somewhat benefited, if the price structure, especially of the ex-depot rates of motor gasoline (petrol) and of light diesel oil, was to be managed with prudence.

After a moratorium of more than a year, the government finally raised the domestic prices last month to adjust these gradually with the foreign market prices. First, the ex-depot price of local motor gasoline was jacked up by around Rs4 per litre bringing it to Rs58.70, followed by an upward revision that increased the gasoline to Rs62.81, again a rise of around Rs4. The break- up of price of petroleum products shows a combination of prescribed and ex-depot price wherein general sales tax inflates the price of motor gasoline.

Equalising of the ex-depot price to the level of prescribed price of motor gasoline can give a relief of about Rs10 per litre to consumers because of the low determination of the prescribed price. The ex-depot price of motor gasoline in the latest petroleum products price rise was determined as Rs62.81 while prescribed price was Rs51.25 per litre. Similarly, ex-depot price of light diesel oil per litre was Rs38.59 compared to Rs30.73 prescribed price.

Usually, prescribed price has a difference of more than Rs10 with the maximum ex-depot price and absorbs usually ex-refinery import parity price, excise duty, petroleum development levy, dealers’ commission and distributors’ margin of oil marketing companies while ex-depot price per litre of motor gasoline includes general sales tax and inland freight margin.

After application of these levies, the government is unlikely to lose by waiving GST and freight margin over ex-depot price. There is no likelihood of setback in distributor or dealer profit margins in case of bringing ex-depot price at par with the prescribed price.

General sales tax and inland freight margin result in approximately 18 per cent cost addition to the ex-depot price per litre, wherein only GST head adds up to nearly 15 per cent to the consumer price per litre.

Chairman, Petroleum Dealers Association, Abdul Sami Khan says that 30 per cent taxes on petrol (motor gasoline) throughout supply chain must be withdrawn to lower consumer price of petrol to a suitable level.

“Of course, commission of oil marketing companies should be brought to a justifiable level,” he adds. The government can bring down petrol price by eliminating sales tax at least on retail and sales outlet to consumers.

In the past, the motor gasoline price per litre for direct and retail consumer was different. Government departments, public sector companies, defence, and Pakistan Railways were provided a Rs3 concession on market price of premium motor gasoline per litre by oil marketing companies. But in the mid-2007 the disparity was removed.

The transport sector is directly hit if diesel or motor gasoline prices go up. High transport costs affect the public and also raise costs in supply chain of raw materials, consumer goods and exportable items.

The government should also have evaluated the impact density prior to fare-raise of Rs2 per kilometer of taxis and rickshaws as this would have shown that actual increase in cost of a diesel-run taxi per kilometer following latest revision of diesel price had not exceeded over Re0.20. However, Rs0.20 per kilometer fare-raise was allowed to inter-city bus transports.

Since public transports carry passengers-load in excess of pre-defined limit in violation of motor vehicle act they already earn more fares per journey than made-for. Instead of seat-by-seat travelling, the passengers are stuffed in buses and coaches to travel. It gives additional profits to transporters.

Dr Tahir Soomro, former EDO, Transport & Communications says that rise in public transport fare was inevitable as cost of rendering transport services increases. Increase in transport fare is justifiable.

Industry is dependent on imported oil products and their industrial requirements cannot be denied. However, when the import bill of crude oil is touching an all time high record, shift to alternate energy resource becomes imperative.

This shift is important for running public transportation sector. CNG use must be promoted, says Abdul Sami, who also holds chairmanship of CNG Dealers Association. CNG air-conditioned public transports can be introduced. Since Pakistan in general and Sindh in particular are self-sufficient in natural gas, we wouldn’t be running out of gas soon. So far, 2,000 CNG stations have been set up across the country and 1000 more are underway. The government needs to review the CNG rates and petroleum price structure.