The Oil and Gas Regulatory Authority (OGRA) is planning to cut petroleum prices by Rs 8-10 from first February this year following continuous sliding crude oil prices in the international market, especially Saudi Arabia where the crude oil price stood below $22 per barrel.
Petrol and diesel were being sold at Rs 40.39 and Rs 26.21 per litre respectively in January 2005 when the prices of crude oil were around $60-65, the analysts said.
If the government reduces petrol price by Rs 8-10 from February 1, the petrol price will stand at Rs 67-68 per liter in Pakistan. The actual price should be around Rs 40-50 if the Arab crude oil price was below $25 per barrel, the analyst claimed.
The analyst said oil prices of the petroleum products had been on the decline due to world’s oversupply from the OPEC and sluggish demand from China and Russia, but domestic oil prices did not show any big drop as the government raised taxes to meet its budgetary targets.
The OGRA regulates prices of petrol and diesel while furnace oil’s (FO) price is determined through a market mechanism. Interestingly, consumers are paying $0.73 per litre on petrol which is far lower than regional average of $1.1 per litre, the analyst said. One of the reasons for higher petrol price in the region is because of higher devaluation of regional currencies against the US dollar, he observed.
On the flip side, consumers were paying more on every litre of diesel consumed compared to other regional countries.
The OGRA has prepared a summary for the deduction of Rs 8-10 in the petroleum prices on Saturday, a source in the ministry said, but the reduction in prices depends on Arab crude oil price which stood at $27 per barrel on Friday. If the prices go up again, the prices may be stable for next month again, he added.
Benchmark Arab Light Crude has dropped by 52.77 per cent to $27 per barrel now from $55 in January 2015, but the government reduced petrol and diesel prices by 3 per cent and 6 per cent, respectively, in the last one year.
In January 2015, petrol and diesel prices stood at Rs 78.3 and Rs 86.23 per litre while currently the two fuels were selling at Rs 76.2 and Rs 80.79. The government, instead of passing on the benefit of record low world oil prices to consumers, has raised petroleum development levy (PDL) and general sales tax on petroleum products.
Currently, consumers were paying around Rs 24 and Rs 27 per litre sales tax on petrol and diesel.
“The price itself is irrational,” said Khalid al-Falih, chairman of state-owned oil firm Saudi Aramco, at the World Economic Forum in the Swiss ski resort of Davos on Thursday. “I do feel that the market has overshot on the low side and that it is inevitable that it will start turning up. Where will we be by year-end? I don’t know but certainly I would bet that it is going to be higher than where we are today.”
On the other hand, he said, FO price declined by 27 per cent during the last year in line with international prices. “In Pakistan, 90 per cent of FO is consumed by the power sector, as 40 per cent of country’s total electricity is generated through it.” He was of the view that power generation companies would increase furnace oil consumption to meet energy demand and cheaper prices would improve their overall liquidity.
Since petrol and diesel meet 85 per cent of the fuel requirement in domestic transportation, lower product prices may create additional demand for automobiles, he said. The world’s biggest oil exporter Saudi Arabia declared this week that ultra-low oil prices were “irrational” as crude hit new 12-year lows under $27 on the global supply glut.
The OPEC left its collective production ceiling unchanged, in both June and December 2015, at 30 million barrels per day. Estimated actual output stands at 32 million bpd. So far this year, prices faced a rapid descent as concerns also snowballed over the strong dollar and weak demand in the faltering world economy, particularly in powerhouse China.
“The decision made by OPEC’s main player, Saudi Arabia, not to cut supply in order to protect its market share, triggered a price war,” noted Dr Nikos Paltalidis, finance lecturer at Durham University Business School. “By pushing prices to such low levels, high-cost countries, such as Russia, Iran and shale-oil producers in the United States, will face severe pressure to close down unprofitable investments.” He said: “The main target from this policy is to force Russia and Iran to curb the production of oil. OPEC’s share of the world oil market is only 30 per cent, down from almost 60 per cent 20 years ago, and they want to increase their share in the global oil market.”