Petroleum prices dilemma

The political commotion over the recent increase in prices of petroleum products has put the PPP-led government in a very difficult situation. If it withdraws this increase, it faces the spectre of a yawning fiscal deficit and failure to meet international financial institutions’ conditionalities for loans. And if it does not, it faces a hostile political reaction, which will further weaken its already weak position after the PPP’s ouster from the coalition in Punjab. Like in January, when the government was ultimately forced to withdraw oil prices as part of its efforts to implement PML-N’s 10-point agenda, response from the entire political spectrum has been very negative. The PML-N, PTI and JI have openly expressed their displeasure, while the PPP’s coalition partner, the MQM, not only rejected Oil and Gas Regulatory Authority’s (OGRA’s) decision, it has given the government three days to withdraw the raise. Granted that the hike in prices of petroleum products will have a cumulative effect on the prices of all other commodities and further burden the public, nevertheless, it is very difficult for the government to avoid this raise in view of the hike in international markets.Political crisis in the Middle East has affected oil supplies from countries like Egypt and Libya and disturbed the balance of demand and supply, inducing inflationary trends in oil markets. Pakistan has linked domestic prices of petroleum products with those in the international markets. If in coming months, international rates decline, OGRA will automatically revise the price accordingly in its monthly review. However, it is more likely that rival parties would not listen to this logic and try to take advantage of the PPP’s difficult position. It is not just Pakistan’s government that is facing this dilemma; other countries too are calculating the risks of the gap in demand and supply of petroleum. After disruption of oil supplies from Libya, Saudi Arabia has pledged to boost production, but it will take some days before it could stabilise the market. Also, there is no guarantee that this will continue in the long-term if the situation so demands. A country like Pakistan, with the economy teetering on the brink, has few choices.

In addition to increasing prices of various petroleum products, such as motor spirit, kerosene, high speed diesel, light diesel oil, high octane blending content, etc, by 9.9 percent, the government has also increased the rate of petroleum levy in a bid to raise revenues. This is where the trap lies because opponents of this move argue that instead of taxing petroleum products, which constitute almost 50 percent of the pump price, the government should check corruption in its ranks and collect revenue from alternate sources. In fact, the ‘subsidy’ on petroleum prices is a misnomer, because when the government does not collect a certain tax on petroleum products, it is called subsidy. However, we have to admit that this is an inescapable reality. The government cannot survive without imposing these taxes. The situation has been complicated due to protests by Pakistan Petroleum Dealers Association against reduction in the margin of their commission in sales. PML-N chief Nawaz Sharif has threatened to launch another long march and might use the increase in petroleum prices as a plank to launch his anti-government movement. Politically, the government is stuck and if not handled carefully, the situation might explode – Dailytimes