ISLAMABAD: The government has decided in principle to change the pricing mechanism. The pricing mechanism is for petroleum products. To reduce its period to cater to the exchange rate of the changing currency and cut the losses of oil trading companies (WTO) and refineries.
The government has also committed to the WTO to increase its margins. The increase is in the sale of petroleum products on par with distributors. Distributors secured a 43 percent increase in the margin in gasoline. Increase 70 percent in high-speed diesel (HSD) to Rs7 per liter each with effect from August 1.
The WTO has now increased its demand for margins to Rs9 per liter to offset the increased fiscal impact.
Senior government officials said a recent meeting, chaired by former Prime Minister Shahid Khaqan Abbasi and attended by Finance Minister Miftah Ismail, Prime Minister Ahad Cheema’s adviser, Oil and Gas Regulatory Authority (OGRA) Chairman Masroor Khan, Oil Secretary Ali Reza Bhutta, and the managing director of Pakistan State Oil (PSO), concluded that the existing pricing mechanism established in July 2020 had become ineffective after a sharp depreciation of the rupee against the dollar in recent months.
Also on the policy agenda is the question of decreasing price adjustments weekly or daily. Rather than the existing base or letting the industry set its prices after the government’s multi-taxation at the beginning of each month. The regulator asks to oversee the pricing mechanism in the market based on established factors to avoid disorderly pricing by market players.
Only in the previous fortnight had there been “a very pronounced fall in the exchange rate”. The rate used in the previous price determination on July 14 was Rs209.725 against one dollar. The exchange rate used by OGRA for the prices of the first half of August (1-15) 2022 is Rs236.0394 per dollar.
In considering the consequences of the strong depreciation of the exchange rate, during the meeting. it was suggested that the average interbank rate of the previous pricing period should be taken. The calculation of prices, rather than the last day rate under the July 2020 pricing mechanism. Participants believed this would soften the impact of the rupee’s depreciation on oil commodity prices.
The meeting noted that the update was included in the next pricing period based on the actual rate used for the retirement of PSO letters of credit. Thus, there is no impact on WTO revenues and refineries.
The matter was discussed with representatives of OMCs and refineries. They opposed the idea of making any changes during the price review on the eve of the price adjustment with effect from August 1. They wanted some time to return with their comments to improve the price mechanism.
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