Fluctuation in petrol pricing, factors need to understand

Since the post-pandemic, life came back to a normal routine where countries lifted up lockdowns and travel banned. In the same way, trade activities came back on the horse and the demand for oil goes excessively high after being monitored dismissively during the covid crisis. 

Pakistan is a major importer of oil and the devaluation of PKR rupees directly influenced the petrol price because the crude oil cost is valued at USD in International Oil Market. So, it stands out a mile to say the rupee exchange rate against the USD is one of the factors of the price fluctuation.

Several more components signifying the segment of the overall oil value chain including crude oil exploration, production, refining, and distribution of the product which all links to IOM. Considering mentioned segment forms the overall price framework but it varies from country to country.

What we witness during the fluctuation in petrol price is criticism - a destructive criticism based on political point scoring without even visualizing the ground reality, having said there is room for criticism but should be constructive not based on bias. Give it a Read

This read helps you to understand all those factors considering the past few year's histories on the pricing framework, recent trends, and what consumers can expect in future.  

Let's break down the pricing framework, currently, the cost of the petrol is around 128 Rs/Ltr but who regulates the price, steers from three components, 1) Ex-Ref: is the refinery price which dependent on international crude/fuel prices, 2) %Seller: is a combined percentage of In-land Freight Equalization Margin calculated by OGRA, distributor margin and dealer commission and 3) %Tax: now this the percentage adding of petroleum levy and sales tax.  

Distribution Graph of Sep 21'

 

• The biggest factor influencing the final cost of petrol in Pakistan is the international oil market - whatever the cost reported in IOM every country is bound to pay that cost (excluding local taxation cost). In early 2018, the devaluation of the Pakistani rupee means that the cost of a barrel of crude oil started rising significantly for Pakistan despite the price remained stable in USD. 

For example, a barrel of crude oil priced at USD 67 in January 2018 cost PKR 7,400 while in May 2021, the same USD price cost PKR 10,205.

• Should the government intentionally do that course of action, well this is a myth, it is quite clear to you now Govt has only control on tax rates - sales tax and petroleum levy. In a fiscal budget of 2021-22, Govt targets 610bn Rs Petroleum Levy to improve revenue collection as targeted under 2021-22 under the IMF program. The reality seems Govt will not meet the target because the collection is only possible if the Govt charge PL on MS petrol from Rs25 to Rs30 per litre which is not possible because of an increase in oil price in the international market.

In laymen terms, if the GST & PL were both applied today to meet the required target the cost of petrol may increase up to 140Rs to 150Rs per litre. Instead, the taxation limits to only 11% amid boosting the revenue Govt has suffered a loss of 18Rs to 20Rs on every litre. Keep in mind that almost 30 million litres of petrol are sold each day which equates to around 600 million. 

Should the govt sustain it in a long term?

More Reads:

https://www.econjournals.com/index.php/ijeep/article/view/2668/1989

https://tribune.com.pk/story/2320635/federal-govt-is-charging-164-tax-on-petrol-asad-umar