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Oil on the Boil
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By Nadeem Malik
Islamabad: The government has announced a biting price increase of upto 9.4 percent in petrol and 5.81 percent in gas tariffs Thursday.
The price increase will be effective from Friday, which is also the first day of the new fiscal year. The other major coincident is 5 percent fall in international fuel oil prices during the last three-days from the peak of $61 to below $57 a barrel.
According to an announcement of the Oil Companies Advisory Committee (OCAC), the price of the Motor Spirit has been increased by Rs 3.41 to 48.94, HOBC by Rs 3.81 to 54.33, Kerosene Oil by Rs 1.55 to 29.53 and High Speed Diesel by Rs 2.68 to 31.74 per litre. The Ministry of Petroleum and Natural Resources separately announced 5.81 percent increase in gas tariffs, except for the life-line consumers falling in the slab of 0-100 cubic meters. The gas tariff for this category remains unchanged.
The government resorted to this highly unpopular measure owing to steep rise in international fuel oil prices, which eroded taxes charged on the retail prices significantly. The government has not paid anything out of its pocket to subsidize the oil prices. It was the falling revenue potential, which created difficulties for the government, which heavily relies on petroleum taxes. From the fixed Petroleum Development Levy (PDL) to 15 percent General Sales Tax (GST), the POL products are by far one of the major revenue contributor for the state.
However, given the poverty situation in the country, coupled with rising inflationary pressures, the State Bank of Pakistan (SBP) opposed this measure. In its last report, the central bank proposed removal of taxes on petroleum and suggested real estate sector, as a potential revenue sources, where billions of dollar deals are taking place totally unnoticed so far. However, the rich and powerful real estate investors remained untouched in the budget.
The poor has double trouble. They have no jobs. The government claimed improved employment situation only by showing increased in the proportionate share of so-called ‘unpaid family workers’. A highly controversial news for vastly jobless youth of the country. Secondly, the rising prices of food, transport and utilities have eroded whatever was left with them. The official inflation numbers suggest 9.33 percent inflation in Pakistan, which will definitely rise faster now with the higher burden of fuel, food and cooking.
The authorities did their best to propagate a message that petrol and diesel prices are higher in New Delhi, but did not bother to compare food prices, which are cheaper by 15-50 percent on an average. The kerosene, LPG and electricity tariffs are also subsidized in India. In Pakistan, however, the next dose of possible increase in electricity tariffs should not be far away, as 70 percent of the power generation is based on furnace oil and gas.
International fuel oil prices have started showing a downward trend, with US crude falling to $56.75 a barrel after a five percent slide in two days from Monday's all-time peak of $60.95. London Brent shed 49 cents to $55.66 a barrel on Thursday.
In the international market experts are watching for signs inflated energy costs are biting into world economic growth, in turn slowing the oil demand growth that is testing global crude production and refining capacity. According to a forecast of the United Nations global growth will slow to three percent this year from 4.1 percent last year because of high energy prices and rising interest rates.
The Organization of the Petroleum Exporting Countries has started talks this week on raising output by 500,000 barrels per day (bpd), which is expected to take pressures off from the oil marginally. China is now the world's second biggest oil consumer and the latest spike in prices is blamed on demand rather than the cuts in Middle East oil supplies that sent the world into recession in the 1970s and early 80s.
In Pakistan, however, the sophistication of measuring impact of price hike on poverty or growth is a non-issue so far. No body cares how the rising prices would bite the poor or is there any threat to the new found rapid growth rate, which touched 8.4 percent level during 2004-05. By all estimates, the government would find it hard to maintain the rate of growth, with the kind of price increases taking place in the economy.
Even the competitiveness of exports from Pakistan, which is so crucial after the end of the textile quotas, is at stake now. The fuel price increase would directly add to input costs for the industry and transportation costs would also rise. The gas is used as a feedstock by the fertilizer sector and furnace oil is a major input for cement industry. So, pressure cooker situation is evolving in the overheated economy. However, the Oil Marketing Companies (OMCs) stand to gain, with already swelling profits.
ENDS.
