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Since I have a little bit of knowledge of the industry, I'll try to decipher what's going on with fuels availability in Pakistan. Thread https://twitter.com/RedWishDotCom/status/1274356327809245185
The way fuel prices are set in Pakistan is fundamentally flawed.
GoP sets the price at which refineries can sell fuel to OMCs based on the weighted average of the cost of PSO's imports in the previous month.
Refineries MUST sell at that price, even if it's at a loss
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GoP sets the price at which refineries can sell fuel to OMCs based on the weighted average of the cost of PSO's imports in the previous month.
Refineries MUST sell at that price, even if it's at a loss
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OMCs are allowed a fixed profit margin (around Rs 2.8 per liter) for the fuel they sell. From this, they're expected to pay for all their operations, safety, capital investment etc, as well as provide a return on investment to shareholders
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If an OMC can import at a price lower than the average of PSO imports, they bank a few paisas extra. If their imports cost more, they take the hit.
An OMC with good safety and great service earns the same per litre as one with crap safety and rubbish service.
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An OMC with good safety and great service earns the same per litre as one with crap safety and rubbish service.
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On March 27, GoP banned fuel imports. It was expected that COVID would cause a severe fall in demand and the move was designed to protect refineries from having production they cannot sell.
As a result, OMCs probably had to cancel orders and take the hit for this
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As a result, OMCs probably had to cancel orders and take the hit for this
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Then OMC fuel sales suddenly shoot up inexplicably*, and a month later imports were allowed again. Now OMCs have to scramble to arrange spot fuel cargoes to meet this demand.
*and by inexplicably, I mean Iran border was closed so smuggling went way down
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*and by inexplicably, I mean Iran border was closed so smuggling went way down
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PSO website shows end customer petrol prices as follows:
March: 111.59
April: 96.58
May: 81.58
June: 74.52
Average Brent Crude for the same months in US$:
March: 32.01
April: 18.38
May: 29.38
June so far: 39.42
Notice any disconnect?
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March: 111.59
April: 96.58
May: 81.58
June: 74.52
Average Brent Crude for the same months in US$:
March: 32.01
April: 18.38
May: 29.38
June so far: 39.42
Notice any disconnect?
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So people importing petrol in May had to pay approx $11 a barrel (about Rs 11 per litre) more for their imports than the benchmark the price for May was set at.
The current ex refinery price of petrol is Rs 23.99 per litre. About 6 rupees per litre is the OMC and pump owner margin, rest is taxes.
The current price of crude oil is approx Rs 41 per litre. That's before you transport it to Pakistan and convert it to petrol.
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The current price of crude oil is approx Rs 41 per litre. That's before you transport it to Pakistan and convert it to petrol.
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In such a situation, any sensible refinery would cut down production to bare minimum, to stop the bleeding. I suspect that's what happened.
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So now OMC sales have shot up and local fuel availability has tanked, as refineries refuse to honour committed volumes. Basically they're screwed.
Oopar se government and media saying hoarding is happening, when realistically most OMCs have hardly any fuel
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Oopar se government and media saying hoarding is happening, when realistically most OMCs have hardly any fuel
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Any OMC which then scrambles to arrange fuel cargoes will be buying at current intl prices and selling at last month's intl prices. Each litre they import will lose them money, because GoP has fixed the end customer price.
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The solution to this is to deregulate fuel prices. Then refineries will charge what they think is a fair price, and OMCs will be free to buy from them or import if that's cheaper for them.
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Good OMCs will also be able to charge a premium for better quality and better service, and price in their actual purchase cost. Each pump will be competing on cost as well as service with the one down the road.
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On that note, there are also way too many OMCs in Pakistan for the size of the market. There's 30+ licensed OMCs, for a market of this size probably 6-7 would be plenty.
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I'm willing to bet money that other than the top 7-8, none of the other meet OGRA requirements for stocks, safety standards, investment etc.
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As a result, there are lots of small players cutting corners to make money, and loads of fuel stations not selling enough fuel to make ends meet and hence cutting corners of their own.
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Remember that any of the big 5 OMCs loses about 100 million rupees in inventory losses every time the price of fuel falls by Re 1 (and gains the same when it rises). You'll see a lot of red in the June accounts of OMCs.
That might be a factor in the current crisis
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That might be a factor in the current crisis
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One of the licensing regulations is that OMCs must maintain inventory amounting to 20 days sales.
I'm willing to bet that other than the 2-3 multinationals and PSO, none of the others were even close to those levels, to minimise the financial impact of falling prices.
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I'm willing to bet that other than the 2-3 multinationals and PSO, none of the others were even close to those levels, to minimise the financial impact of falling prices.
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TL:DR
This crisis is largely because the way fuel prices are set in Pakistan is messed up. You want to avoid future crises? Deregulate fuel prices.
/end
This crisis is largely because the way fuel prices are set in Pakistan is messed up. You want to avoid future crises? Deregulate fuel prices.
/end
