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Increase in oil prices

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The government on 16th Oct 2021announced a massive increase in the prices of all petroleum products with immediate effect for the next 15 days.

According to a notification issued by the Ministry of Finance, the prices of petrol and high-speed diesel (HSD) have been increased by Rs10.49 and Rs12.44 per liter respectively.

The price of kerosene oil has been increased by Rs10.95 while light speed diesel has got costlier by Rs8.84.

“At present, oil prices have risen around $85 a barrel (Global Benchmark Brent) highest since October 2018.From October 16 (today), the new price of petrol will be Rs137.79 per liter; high-speed diesel will be Rs134.48 per liter. While kerosene oil will be sold at Rs110.26 per liter and light diesel oil at Rs108.35.

It adds that entire energy chain prices have witnessed a strong surge in the past couple of months due to higher demand for energy spots and supply bottlenecks.

The petroleum industry around the globe is currently struggling due to the turbulent costs of crude oil, which is prompting Oil Marketing Companies (OMCs) to go for an increase in the price of petroleum products.. But in Pakistan where poverty level is already very high this increase is like explosion of an atomic bomb.

Oil prices are always debatable and remain an important variable in determining the economic activity of any country. The size of oil prices increase depends on the i) – share of the cost of oil in overall GDP, ii) – the degree of dependence on oil (total value of import oil) and iii)- consumption of oil domestically, and iv)- dependence on alternative sources of fuel. It was already projected and estimated globally that the oil demand is expected to increase ninety eight millions barrels/ day in next four year and 118 million barrels / day during next twenty years (in 2030). The time of cheap availability of all kinds of fuel has gone because of fast increase in population, which ultimately increase the demand for energy domestically and national and overall worldwide. The price of fuel has tendency to increase further till the demand growth is curbed and new technologies are introduced which reduces dependency on oil. In Pakistan, the justification for this increase is given by Oil and Gas Regulatory Authority (OGRA) on various grounds. Huge rise in world oil price shifted the burden to the consumers as government is already running severe losses and equally shifted this burden to households. Also consumption of kerosene oil, diesel oil and petroleum products at household level also increase.

OGRA also justifies shifting this burden to household to some extent which disturb their food budget also. There has been a continuous increase in the energy consumption in Pakistan since 1996-97. The major change in energy mix has taken place in the share of oil and gas consumption, the major consumption out of all energy sources are gas and oil consumption. The share of gas has increased from 29 % 41% during 1996-97 to 2006-07 and the share of oil in total energy consumption mix has declined from 48 % in 1996-97 to 29 % to 2006-07. 0% 10% 20% 30% 40% 50% percentage 1996-97 years

Energy Consumption by Source Oil LGP Gas Electricity Energy Consumption by Source Oil LGP Gas Electricity Coal shows around 41 % need of energy is provided by the indigenous gas, 29 % met by domestic and also by oils imports. LPG is only 2 %, nuclear and coal share to energy use is 16 % and 12% respectively, while the petroleum products consumption is overall large exhibiting a declining trend,

Prices of oil and inflation rate are directly proportional and always change in the same direction, which often offset the budget of the government and is made them deficit, which ultimately burden to the transport user with an increase in the prices of all kinds of fuel. Higher oil prices touching $100 a barrel will hit domestic economy hard. It is not the question of oil importing countries or low income countries but also the concern of high income and oil exporting countries.

The international prices of oil have not been shifted to domestic consumers of oil and this led to further enhance the inflation. Three, with these two effects, overall GDP growth effects overall either by the direct change in the fuel prices or by the adjustment made due to increase in prices of oil or both. there are some basic factors which usually make the difference in oil prices internationally and in the domestic market. The major factor determining oil prices is of course the supply and demand. The D (demand) and S (supply) is not a simple matter: one has to look into complexities of this factor. Another overwhelming factor distributing oil prices is the rate of exchange following weakening of the US dollar. Hence the major factor for oil price hike is the weakening of the dollar against different currencies. Crude oil price have touched its peak of more than $145/barrel has receded to nearly half. As the developed countries are plunging into deeper into financial problems it is feared that price may go below $50/barrel. Neither the OPEC nor the US is interested in letting the prices slip below $75/bareel. A slither in the dollar was one factor behind the convention in oil prices. Some patrons bought oil in large quantity to protect themselves against the continuously weakening dollar. The continuous boom in price of oil created worries for oil importing countries as they have to bear the high economic cost.

Oil prices affect the whole economy due to various factors including cost of production, income effects, reallocation of resources, terms of trade and by uncertainties. In Pakistan, falling foreign exchange reserves have created immediate problem of oil import. Primary causes of sudden fall in oil prices deeply concerns with energy demand that was shrinking because of a US-led global economic slowdown. As a matter of fact among all major developing countries, Pakistan during 2008 had the worst levels of foreign deficit and inflation of GDP of about 8.5 % and 17% respectively; it was the weakest and most vulnerable situation for Pakistan’s economy.

Khan, for the unusual increase in the international oil prices and sharp decline in prices suddenly, viewed that there were some fundamentals as well as some sentimental which played a role in pushing up the oil prices. The primary reasons for price hike were the increase in demand globally as well as advance purchases anticipating future demand. The geo political conditions in different regions also aggravated the situation. However, the primary reason of rising oil prices was depreciation of different currencies including dollar and exchange rate.

The possible outcomes and confronts presented of increase in oil prices in Pakistan. The continuous increase in the international oil prices had affected negatively the BOP (balance of payment) and the budgetary position of Pakistan and added inflationary pressures on the economy. In less developed countries like Pakistan, most of the fuel is used by transporters, farmers and heavy machines and indirectly consumers have to pay, which affects their households budget through the increase in the food prices.

The government is planning to transfer the increase in prices to consumers by slightly increasing the tax rates in a bid to refresh the IMF program upon securing the sixth review and ensuring disbursement of about $1 billion to stabilize the petroleum sector of Pakistan.

It bears mentioning that the price of petrol has increased by about Rs. 19 per liter over the past four months. The people are beginning to grow weary and concerned about the frequent price hikes as the fuel is getting far too expensive for a vast majority of the daily commuters.

The prices of all petroleum products may go significantly owing to higher international prices and some adjustments in tax rates.

Three different options are under consideration of the government.

Under one option, based precisely on existing tax rates and oil import price, the ex-depot price of high speed diesel (HSD) is estimated to go up by Rs3 per liter and that of petrol by about Rs6 per liter.

Under the second option which is based on standard 17pc GST and full petroleum levy permissible under the law, the ex-depot prices of HSD and petrol are calculated to go up by Rs34 and Rs37 per litre, respectively. Under the law, the government can increase petroleum levy to a maximum of Rs30 per litre on HSD and petrol, Rs12 on kerosene and Rs10 on light diesel oil (LDO).

Officials say that based on current year’s revised revenue estimates, the government is expected to adopt a third option. This means that the tax rates — petroleum levy in case of HSD and petrol and both petroleum levy and GST in case of kerosene and LDO — would be slightly increased in addition to passing on the impact of higher imported prices. In that case, the prices of all products will be increased in the range of Rs7-9 per liter.

Hike to be based on higher international prices, tax adjustments

Currently, the ex-depot price of HSD is Rs112.55 per litre and that of petrol Rs110.69 per litre.

The government had already collected higher than targeted revenue on petroleum products through petroleum levy in the 11 months of the current fiscal year. Therefore, it was comfortable with minor adjustments in petroleum levy. According to the ministry of finance, the collection on account of petroleum levy had amounted to Rs370 billion in the first nine months of current fiscal year against the annual target of Rs450bn.

Over the last two years, the government has been tweaking with petroleum levy rates instead of GST as the levy remains in the federal kitty while GST goes to the divisible pool taxes and thus about 57 per cent share of it is given to the provinces.

Petrol and HSD are two major products that generate most of revenue for the government because of their massive and yet growing consumption in the country. Average petrol sales are touching 700,000 tons per month against the monthly consumption of around 600,000 tons of HSD. The sales of kerosene and LDO are generally less than 11,000 and 2,000 tons per month, respectively.

Under the revised mechanism, oil prices are revised by the government on a fortnightly basis to pass on the impact of international prices published in Platt’s Oil gram, instead of previous mechanism of monthly calculations on the basis of import cost of the Pakistan State Oil.

One immediate step is to cut petrol supply to all ministers, government officials to half of their admissible free supply. This would involve government establishment officials to find some ways but currently all politicians in government as well  as position and establishment are on one page to enjoy free supply. Secondly making electricity by using oil may be shifted to other sources like coal and hydel power projects.

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