ISLAMABAD: The new pricing strategy in Pakistan will introduce a daily pricing strategy for petroleum products that will change the way in which prices are set. While prices have been set twice a week before now, this new strategy will change to one in which prices will be set on a nightly basis. This Pakistan daily fuel price strategy proposal by OGRA is currently under consideration by the government.
As per the statement of an official in the Petroleum Division, the below mentioned are the four types of petroleum products which will have their prices fixed each day only by the Oil and Gas Regulatory Authority (OGRA):
- Motor Spirit (MS/Petrol)
- High Speed Diesel (HSD)
- Light Diesel Oil (LDO)
- Kerosene Oil (KO)
The changeover from fortnight-based to daily-based pricing brings an end to the fortnight delay caused by the movement of international crude prices and the adjustments made in retail prices locally – this is a characteristic feature of the present system that causes considerable misalignment between international oil prices and domestic ones.
Why Daily Pricing Works — The Economics Behind It
The Pakistan daily fuel price proposal by OGRA aims to fix a long-known shortcoming of periodic pricing mechanisms. In the system of fortnightly pricing, the prices are fixed by taking into account the two-week average of international oil prices and foreign exchange rates. However, in case there is an unexpected surge in international oil prices in the middle of this two-week period, which happened during the latest Iran-US blockade crisis, the prices continue to be at the same level till the next revision period.
On the contrary, if prices abroad drop considerably mid-way through the period, consumers keep on paying above-market prices till such time that the next fortnightly adjustment catches up. Both cases represent distortion in market signals, expose fuel distribution companies to financial risks, and place the government under political pressure whenever the price differential is evident.
The Pakistan Daily Fuel Price Mechanism of OGRA would solve this problem completely since domestic prices would follow any change in the international oil prices and the exchange rates almost in real time without there being any accumulation of gaps in pricing which have continuously led to the destabilization of both government finances and finances of fuel sector firms.
Decreasing the Direct Role of the Government – A Change in Policy
The most structurally important element in the system of Pakistan’s fuel prices set by OGRA is the decrease in the direct role of the government in setting the prices of fuels. At the moment, it is the Petroleum Division which gives recommendations and the government adopts decisions concerning fuel price changes – a process of manipulation of fuel prices for political gain.
Moving the responsibility for setting daily prices to OGRA, which is a regulatory agency having legal obligations to set prices using transparent formulae, provides the mechanism for protecting the process of price-setting from any political manipulations. This is due to the fact that price adjustment will be automatic in accordance with the movements of the market.
The Decision Looming
The daily pricing of petroleum products in Pakistan proposal by the Oil and Gas Regulatory Authority is still under review, but it has not been finalized yet. Once the government makes an announcement regarding this proposal, it will be considered the biggest institutional reform in the history of fuel prices in Pakistan since the current fortnightly review mechanism was introduced.
