Monday, 8 February 2010

Oil pricing and Markets in Pakistan

On Sunday, February 07, 2010, Dr. Farrukh Saleem gave us an excellent analysis of oil pricing and markeket structure in Pakistan.

“On March 25, 2008, Syed Yusuf Raza Gilani took oath as the 23rd prime minister of Pakistan. That fateful day the maximum ex-depot sales price of premium motor gasoline was Rs62.81 per litre. On Jan 31, 2010, OGRA, in exercise of the powers conferred by Section 6(2)(r) of the Oil and Gas Regulatory Ordinance 2002 and Clauses 4 and 4(A) of Section 2 of the Petroleum Products (Petroleum Levy) Ordinance, 1961, jacked the maximum ex-depot sales price of motor gasoline to Rs71.21.

For the record, on Jan 31, the OPEC Basket Price stood at $71.02 per barrel, having declined from $96.49 per barrel, as of March 25, 2008; a decline of more than 25 percent.

Where is our money really going? On Jan 31, the ex-refinery price was notified to be Rs42.72 per litre, transportation Rs4.42 per litre, dealers' commission Rs2.36 per litre and Oil Marketing Companies' margin Rs1.89 per litre for a total of Rs51.39 per litre. The government then directly takes away Rs10 per litre as petroleum levy plus Rs9.82 per litre as general sales tax. So the government gulps down Rs20 per litre of every litre of gasoline consumed in the country.

And, what does the government do with Rs20 per litre of every litre of gasoline consumed in the country? Budget 2009-10 allocated Rs3.3 million per day for every day of the year for the prime minister's foreign tours. Budget 2009-10 allocated Rs0.6 million per day for every day of the year for the president's foreign tours. Budget 2009-10 allocated Rs1 million per day for every day of the year for the Presidency.

And, once the government is done with 178 million Pakistani taxpayers (yes, there are 178 million taxpayers in Pakistan – remember, Rs9.82 per litre general sales tax?) our oil cartel enters the game. Our oil cartel has nine major members: Pakistan State Oil (PSO), Pak-Arab Refinery (PARCO), Attock Refinery Limited (ARL), Attock Petroleum, National Refinery Limited (NRL), Pakistan Refinery (PRL), Chevron/Caltex, Shell Pakistan and Total-PARCO.

Our oil cartel is extremely incestuous: ARL, Attock Petroleum and NRL are all owned by the Attock Group. PSO, Shell and Caltex own PRL jointly. Our government owns 60 percent of PARCO while Total and PARCO are partners. Individual members of the cartel own each other, sit on each others' boards, own projects jointly and all get together to suck the blood out of 178 million Pakistanis.

Next: refining margins charged by Pakistani refineries are almost twice as high as being charged by refineries outside Pakistan. Furthermore, no refinery in Pakistan is technically capable of producing 0.5 percent sulphur diesel (emission control standards in Europe and North America now require refineries to produce ultra-low sulphur diesel). All that our refineries produce is 1 percent sulphur diesel. As a consequence, Pakistani consumers are being supplied an inferior quality product at the price of a superior product. The average differential in price -- between 0.5 percent sulphur diesel and 1 percent sulphur diesel -- is $18 per ton. Pakistani consumers are being ripped off a hefty Rs4 billion a year.

Next: in 2002, our government allowed refineries to impose a 5 percent to 10 percent "deemed duty" in order to create a special reserve for the purpose of upgrading. The refineries sucked up Rs18 billion from Pakistani consumers but not a rupee was spent on upgrading.

Next: someone is making truckloads of money, because transporting a litre of gasoline should not be costing more than Rs0.50 per litre, as opposed to consumers coughing out Rs4.42 per litre.

Governments around the world break cartels. Ours supports them. Governments around the world support consumers. Ours opposes them.”