Petroleum Products Imports

Petrol Prices in Pakistan: Factors Affecting Change

Pakistan imports crude oil from nations that are oil-producing since it lacks any oil wells. The Brent crude price on the world market and Pakistan’s shifting exchange rate serve as the defining factors of this trade. Mobility and public transit became constrained in March 2020 as nations worldwide adopted lockdowns and other containment measures to stop the spread of the coronavirus.

Due to this, there was an unprecedented decline in the world’s demand for oil, and in April 2020, the price of Brent crude reached a low of $18.38 a barrel. According to an April estimate from the International Energy Agency (IEA), consumption was down 30% from the previous year. A large crude oil surplus forced companies to scramble for storage facilities, with stock prices reaching their peak in June 2020.

Oil Capacity

Due to this, the oil producers gradually reduced their capacity for oil production by roughly one-fourth. Life returned to normal when nations relaxed lockdowns and vaccinated their citizens, which increased the demand for oil and drove up prices once more. Brent crude’s price has risen by 46.4% in the past year, hitting $111.93 per barrel on the world market in July 2022.

This rise in costs is largely attributable to the Russo-Ukrainian conflict, which has put undue demand on the world’s oil supplies due to sanctions against Russia and the Organization of the Petroleum Exporting Countries (OPEC) reluctance to increase output levels. The world market for oil In Pakistan, the market has the biggest impact on the final price of gasoline.

The cost of gasoline in Pakistan (in USD)

Even though the price of a barrel of crude oil in US dollars stayed broadly consistent, Pakistan saw a significant spike in the price of a barrel as the rupee started to depreciate in early 2018. In order to provide an example, a barrel of crude oil priced at USD 67 in January 2018 cost PKR 7,400, whereas the same USD price in May 2021 cost PKR 10,205.

The price of gasoline and other imported commodities has skyrocketed due to the unstable exchange rate and the unprecedented devaluation of the rupee versus the US dollar.Petrol Prices in Pakistan: Factors Affecting Change.

Government Price Control

Prices paid for petrol products by end users are an aggregation of various components, each of which represents a link in the total value chain for oil. The cost of gasoline affects every area of the industry, from the discovery and production of crude oil to the refinement and distribution of petroleum products. Governments implement gasoline taxes in all nations, with the exception of those with abundant oil supplies, to raise money to either fulfill budgetary targets or as a tool to guide their energy strategy.

Petrol prices in pakistan products is priced differently in every country in the world. The government can control prices by offering subsidies, setting price caps, or allowing a free, unrestrained market to set the price. In Pakistan’s essentially free-market economy, the government controls the price of gasoline and sets the end-user pricing. As informed by the Oil and Gas Regulatory Authority (OGRA).

This is a crucial weapon for the government to use in order to stabilize prices, ensure redistribution, and accomplish social goals in addition to increasing revenue. Prior to the PTI-led administration shortening the period to a fortnight, fuel prices in Pakistan were revised once a month. The present government will now update the petroleum rates every week, satisfying another requirement for the bailout of the IMF deal, in an effort to revive the stalled $6 billion rescue package from the IMF.

Pakistan’s Petrol Prices and Their Components

The following six factors are used by OGRA to determine the final price of gasoline for consumers in Pakistan.

Price Ex-Refinery

Local refineries purchase crude oil from nations that produce it and market it to the oil industry. Businesses at a cost determined by OGRA known as the ex-refinery price. The Import Parity Price calculator is use to update the price of gasoline.

In essence, the monthly average of the product’s worldwide price as reported in Platt’s Oilgram along with the foreign exchange rate establish the base price. The ex-refinery price was fixed at Rs. 197.39 per liter in accordance with an OGRA regulation dated August 16.

Use of OGRA

OGRA uses the Inland Freight Equalization Margin (IFEM) method to maintain a constant price for gasoline throughout the nation despite differences in the cost of transporting petrol prices in Pakistan products to various depots. Without IFEM, gas prices would differ considerably between cities. According to the notification release on August 16th, the IFEM for motor fuel is calculate at Rs. 5.84.

The profit margin per liter for businesses that distribute oil is called the Oil Marketing Company (OMC) Margin by OGRA. The OMC margin was fix at Rs. 3.68 per liter in the notification that was release on August 16.

Market Margin

This element represents the commission that the proprietors of the gas stations make on each liter of gasoline sold. According to the announcement sent out on August 16, the dealer margin on motor spirit has increased to Rs. 7.

Levy on Petroleum Development (PDL)

The federal government levies a petroleum development levy on petroleum products to generate cash for the government. As Pakistan promised, the tax on these goods will progressively rise by Rs. 50 in order to renew its IMF loan package.

GST, or sales tax, is a predefine % of the sum of all the components described above. The final price after sales tax is deduct is known as the Ex-Depot Sale Price. The maximum ex-depot sale price of Rs. 233.91 per liter includes a GST of Rs. 33.62 per liter.

The Impact of Subsidies Provision

Following record-low costs in the global market in 2020 and 2021, as nations battled with the coronavirus pandemic, industrialized economies had an earlier-than-anticipated recovery from the negative economic effects of Covid-19. Due to this increase in global demand for Brent crude in October 2021, the price of the OPEC basket doubled.

Due to Western sanctions against Russia over its military, the petrol price in Pakistan goods increased by an unprecedented amount in March 2022 compared to the same month last year. Violence in Ukraine. For the first time since 1973, commodity markets experienced shockwaves as a result of the largest spike in energy prices in almost 50 years.

Pakistan can only raise the rates when global crude oil prices start to climb. Because the government is a price-taker for crude oil, which is required to satisfy 30% of its energy demands and produce tax income through gasoline consumption. The PTI administration developed a plan to reduce energy costs.

Announcement

It announced plans to change the pricing by June 30, 2022, and on February 28, 2022. It repealed the general sales tax (GST) and the petrol price Pakistan development levy (PDL) placed on gasoline, bringing the price in Pakistan down by Rs. 10 per liter. As indicated by the FBR’s record tax collection of Rs. 4858 billion in the first 10 months of the fiscal year 2021–22.  Higher revenue collection was intend to pay for the relief package.

The FBR exceeded its goal for the time period by Rs. 239 billion in revenue. It should be noted that in 2021, 35% of the total GST collection came from the GST on gasoline.  Which was previously the single largest source of FBR collection. The subsidies did, in fact, help consumers by bringing down gasoline inflation.

Pakistan’s gasoline costs and the effects of subsidies

However, Pakistan’s levels of gasoline import and consumption were unaffected by the global price increase, it also led to a sizable current account deficit (CAD). However, one of the main requests of the International Monetary Fund was the elimination of this subsidy. As Pakistan increased its pressure for the continuation of its bailout program, the grant was gradually cut.

Oil prices are approaching $120. As Pakistan’s foreign exchange reserves began to dwindle in July, the government shifted the expense of the increase in oil prices onto consumers by raising the price of gasoline. Beginning in early June 2022, the PMLN-led administration raised the price by Rs. 60 per liter in a matter of days in order to reduce the subsidy and satisfy an IMF need for bailout talks.

Enormous Increase Price

This enormous increase came after the price of gasoline increased again.  Which had a disastrous effect on Pakistan’s inflation, imports, exports, and current account deficit. According to a notice from the Finance Division, the most recent development saw an increase in gasoline prices of Rs. 2.07 per liter, reaching Rs. 235.98 per liter. According to the oil and gas regulatory authority.  There have been complaints of fuel being hoarded in advance of price increases and artificial shortages.  Thus this price increase is being implemented right away to address these issues.

According to Reuters witnesses, some gas stations had large lineups outside the day before as locals filled up their tanks on expectations that prices would shortly increase. Due to the Pakistani rupee’s sharp decline in value, the cost of imported commodities will increase even though the country is currently experiencing a balance of payments crisis. A significant portion of Pakistan’s import bill is made up of energy.

Pakistan has less than three weeks’ worth of import coverage in its foreign exchange reserves. And is grappling with a deteriorating balance of payments problem, which is dependent on a successful IMF mission.

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