The oil report

The Oil Inquiry Commission was formed by the Lahore High Court in the wake of the oil crisis which occurred last June. Its report has been submitted and made public.

The cabinet has formed a ministerial committee, which will examine the bonafides of the report and fix responsibility. It is hoped that an expert committee will be formed for this. The report has been received with a lot of scepticism among knowledgeable circles. It makes for interesting reading – especially on two counts; it fixes responsibility on some quite junior government officials and keeps quiet about the higher powers; and it makes an outlandish recommendation of disbanding Ogra, which has obviously rejected the report.

This is not meant to be a complete review of the OIC report but to focus on some of the real issues.

Disbanding Ogra: The most outlandish of the OIC recommendations is about disbanding Ogra without suggesting an alternative. This reflects a lack of maturity and understanding of the oil sector’s peculiarities on the part of the OIC members. It is agreed that Ogra’s performance has not been satisfactory on many accounts including the issues raised in the report. Certainly, OGRA could have done much more than it has been doing. But to recommend disbanding of OGRA without substituting an alternative is, to say the least, rather irresponsible.

The oil shortages and beneficiaries: There were two possible consequences of Covid – lack in demand due to which the Petroleum Division in consultation with OCAC stopped imports; and international prices going down. There was an oil glut internationally and international oil prices went down, while local OMCs hoarded oil to avoid losses, as reportedly they had bought at higher prices. PSO did not resort to hoarding, although it suffered some losses. It should be noted that international oil prices do not immediately affect local Pakistan prices. Local prices at least then were an average of the last one or more months.

Allowing imports in the wake of falling demand, it is argued, could have unacceptable consequences on the local system. Technical people would be aware of the details.

Petroleum Division’s continuing role despite new petroleum rules: There may be a grain of truth in the fact that the petroleum bureaucracy has exploited the lacunae in the Petroleum Rules (1971) and subsequent additions (2016) to continue to play a dominant role in the sector and the regulator has not been allowed to play its due role. Ogra itself has not made any effort to get its due share and role in the regulation of the sector and the petroleum rules. On the other hand, although power lies in the hands of petroleum bureaucracy, there is OCAC (Oil Companies Advisory Committee) which effectively provides the data and framework based on which decisions are taken.

Questions have been raised about the legality of this organization. OCAC is providing a useful function of data sharing and consultation and is a kind of a secretariat for the sector. It may be illegal in market economies but in a regulated sector, it has a useful role. It is a separate matter as to who should it be reporting to – the petroleum division or Ogra. And who should be conducting the Product Review Meetings.

Power is liked by all but it is a responsibility as well. Ministries are understaffed and lack technical manpower. It would be advisable that both the Petroleum Division and Ogra sit together and sort out the lacunae. It is also true that the whole administrative mechanism cannot be entrusted to the regulator. The regulator is like the judiciary; it is not the executive.

Oil price fixation on monthly basis: Oil prices are fixed fortnightly and the OIC has recommended reversion to the monthly routine. The fortnightly system was brought into place to reduce the impact of inventory and discourage hoarding around the price announcement dates. It has been observed that such hoarding and shortage is not occurring these days. In most market economies, oil prices are adjusted daily. Even in the developing countries, price adjustment is done daily. In some countries, it is weekly – so one would not recommend tinkering with the fortnightly system for the sake of mere change.

If at all, one would recommend a daily or weekly system. The OIC report has, however, made a contradictory recommendation on fixing oil prices on the PLATT index. Currently, it is based on PSO’s international bidding and the associated costs. The PLATT system would enable automatic pricing based on a formula punctuated only by the announcement of GoP taxation. In Europe, oil is taxed rather heavily, in fact higher than in Pakistan. Yet, they manage to adjust prices automatically on a daily basis. The government depends on oil taxation and thus, with price variations, it has to adjust taxation margins rather frequently in an effort to balance prices against revenue requirements. Thus, automatic daily pricing may be punctuated by one day in a fortnight. So, the proposed monthly price fixing is going backwards – with incentives for hoarding.

OMC licences and competition: It is true that OMC licences have been awarded without any restraint. Currently, there are 64 OMC licences, out of which only a handful are functioning and meeting the licensing requirements – most important of which is storage. OMC licensees succeed in promising and delaying building of storages. Most OMCs, except large ones, are involved in quasi-legal activities and price manipulation. There is usually on-money involved in such licensing. Black money holders invest in acquiring such licenses lurching for a windfall opportunity.

On the other hand, liberal OMC licensing was introduced to reduce the market impact of large OMCs. One would, therefore, not like to recommend against a liberal OMC policy but would recommend the implementation of licensing rules. There are unlicensed petrol pumps throughout Pakistan and more so in semi urban-rural areas. Its number has been estimated to be around 1500 as opposed to the licensed ones which number 6000 .Reportedly, smaller OMCs are playing a role in catering to this market.

Cheaper fuel for the poor and the public transport: Smaller OMCs can have a useful role in providing cheaper petrol to the poor. We have discussed elsewhere the need for introducing low-priced low octane petrol for motorcycles. Containerized petrol pumps may be introduced by smaller OMCs to cater to this market. It has been estimated that low-octane petrol can be marketed at a price differential of Rs10 per liter. However, this market segment may be voluntary. Those motorcyclists with money and wanting to enjoy more kick and speed may continue to use conventional petrol.

Competition has its advantages; high octane is being sold at Rs108 per liter as opposed to Rs148 until recently. The government has succeeded in introducing Euro-V low sulfur petroleum. More reforms need to be undertaken. Socio-economic objectives have to be promoted as well. We continue to tax and price diesel higher than petrol, as opposed to worldwide trends to the contrary. Diesel is used in public transport and goods transportation. Reversing the current practice may have significant implications on controlling inflation, improving competitiveness of the economy and adding to public welfare. It is hoped that policymakers will heed this oft-repeated submission.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues:

Success and Challenges’.

Email: akhtarali1949@gmail. com