The serious oil crisis in Pakistan

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By Mohammad Zubair

The announcement was sudden. No one expected that in the late hours of June 26, the notification for an unprecedented oil price increase would be issued. It surprised everyone- the media, financial analysts, stockbrokers and opposition politicians. Even top government ministers were taken by surprise including those who are part of the Prime Minister’s economic team and considered very close to him. 

First, the timing was strange considering the practice over the last many years. Price increases or decreases are always effective on the 1st of every month. This time it was made effective four days before the end of the fiscal year (Pakistan’s fiscal year runs from July to June). 

One reason for the premature announcement could be to increase tax collection since the government has been under tremendous pressure to increase tax revenues before the end of the fiscal year, and federal taxes constitute 45 percent of oil price. This can be the only viable reason– otherwise it was a poorly timed move. 

Another exceptional part of the announcement was the absence of the oil regulatory authority (OGRA) in the entire process. As per standard practice, OGRA prepares the summary for the PM suggesting price changes based on international oil prices, rupee-dollar parity and other cost components. It is then the PM’s prerogative whether to agree on the recommendations but the regulatory authority initiates the entire process. 

KARACHI: Activists of National Trade Union Federal (NTUF) and common citizens demonstrating in protest against price hike of petroleum products and non-availability of water and electricity outside the Karachi Press Club on Friday (July 03).

This time, however, the authority was completely bypassed.  It was not the first time OGRA was ignored in the decision making process. Since mid-March, all major decisions have been taken without the involvement or consent of OGRA. As the crisis deepened in June, the petroleum ministry blamed OGRA for the mismanagement. Apparently taken aback, OGRA hit back by issuing a very detailed defense explaining its position and making public the decisions since mid-March that led to the oil crisis in June. 

Following the international outbreak of coronavirus, if there was one product without a supply constraint, it was oil. In fact for two particular reasons oil was available in abundance– declining demand due to lockdowns around the globe and a price war between Saudi Arabia and Russia on reducing oil production. 

The result was a massive oversupply and a plummeting of oil prices not seen in decades. Yet perhaps Pakistan was the only country paralysed due to oil’s non availability. 

As oil prices fell, most analysts in Pakistan thought the government would take full advantage and hedge for future oil supplies. But astonishingly, the petroleum ministry decided on March 20 to halt the import of oil. The oil marketing companies and refineries were informed of this decision- and all in spite of the oil regulatory authority’s warning that oil supplies were available for another 15 days and that Pakistan would run out of supplies as soon as the lockdown was relaxed. 

The ministry’s decision was endorsed by the cabinet committee on energy. OGRA was not even invited to this meeting and was kept out of the process. That is the most damaging aspect of the entire crisis– that OGRA kept warning the government of the impending crisis in April but the government was completely oblivious of the seriousness of the situation. 

On the last day of May, the government announced a price reduction effective June 1st. OGRA advised against announcing the reduction without ensuring adequate supply. 

This advice made sense since the price of oil in the international market had gone up since March and there was no way oil marketing companies could import at higher prices and sell at lower prices. 

Without ensuring basic facts about oil supplies, the PM even tweeted an announcement about the price reductions. And so it could not have been more embarrassing when petrol pumps across Pakistan were without oil in most cases and wherever it was available, there were long lines of cars waiting several hours for their turn. The shortage led to a serious backlash. 

The government regulated price was Rs81 per litre but due to supply constraints, the pumps which had oil supplies were selling for as high as Rs150 per litre. When the shortage became more acute and private oil companies refused to comply with government directives, the petroleum ministry forced Pakistan State Oil, a public sector company, to import and supply oil. This resulted in massive losses amounting to several billion rupees for Pakistan State Oil. 

Any country will be faced with a crisis when there is a price increase as significant as 33 percent and Pakistan is no exception. One can understand the outrage that accompanies such an increase but what does one say when the government announces a reduction in prices and still ends up with a major catastrophe on its hands?

Interestingly, both crises took place in the month of June and in each case, there is a probe committee set up to investigate reasons that led to the situation. 

In recent months, the government has faced one crisis after another– tomatoes, sugar, wheat and now oil. It has reinforced a growing perception that this government is incompetent, lacks capacity and has serious governance issues.

(The writer is a senior member of the Pakistan Muslim League-N party and has previously served as Governor Sindh and  minister for privatisation. Tweets at: @Real_MZubair)