Profit margins of oil companies, dealers likely to go up

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ISLAMABAD: The maiden meeting of the reconstituted Economic Coordination Committee (ECC) of the cabinet is expected this week to consider increasing profit margins of oil marketing companies (OMC) and dealers through prices of petroleum products.

A senior official told Dawn that the oil industry has been lobbying the government for an early decision on higher profit margins on the sale of petrol and high-speed diesel (HSD) in line with the rate of inflation since Prime Minister Shahid Khaqan Abbasi took oath of office on Aug 1.

He said the revised rates of dealer commission and OMC margin were due since July 1 under a previous decision of the ECC. Now the dealers and OMCs are also demanding a 0.4 paisa per litre increase on account of delay in the decision-making, he said.

It will also debate if the pricing of HSD should be completely deregulated, allowing oil companies to set its prices depending on their expenses and freight costs or continuing with margins fixed by the government.

A senior government official said the Ministry of Petroleum and Natural Resources under Mr Abbasi had moved in June this year a summary to the ECC for the deregulation of HSD prices despite strong opposition from the Planning Commission and the Oil and Gas Regulatory Authority (Ogra). The ECC under Finance Minister Ishaq Dar had not taken up the issue.

The situation is changed altogether after the elevation of Mr Abbasi as prime minister. Mr Abbasi last week reconstituted the ECC and became its chairman instead of Mr Dar.

The ECC had earlier linked the revision in dealer margins and OMC commission on oil products to the consumer price index (CPI) in Nov 2014. Now the petroleum ministry is seeking the deregulation of HSD prices to encourage OMCs and dealers to invest and create additional storage capacity.

In its summary, the ministry has proposed a cumulative increase of 33 paisa per litre in dealer commission and OMC margin on petrol at the rate of 19 paisa and 14 paisa per litre, respectively. It has proposed two options on HSD. Either the margin of dealers and OMCs on HSD should go up by 16 paisa and 14 paisa per litre, respectively, or the government should simply deregulate the diesel price.

The Planning Commission and Ogra have questioned the argument that the deregulation of diesel prices will lead to increased investment and creation of additional storage capacity.

The two organisations argued that the same argument used in 2000 for the deregulation of the oil sector involving healthy incentives of “deemed duty” was misused for billions of rupees of additional profitability instead of increasing storage capacity.

The petroleum ministry said dealer commissions and OMC margins on two major products – petrol and HSD – are being revised annually on the basis of CPI since 2014 under a decision of the ECC.

On the same principle, the OMC margin on petrol should be increased from Rs2.41 to Rs2.55 per litre. For dealers, it should be jacked up from Rs3.16 to Rs3.35 per litre, the petroleum ministry said, adding that oil companies were demanding a higher increase of 18 paisa per litre instead of 14 paisa.

In case of HSD, the petroleum ministry proposed that “instead of revising (margins for dealers and OMCs) on the CPI basis, it should be deregulated under the government’s policy of liberalisation and deregulation in a phased manner to encourage and support investment, which may lead to an increase in the oil storage capacity in the country by enhancing days cover”.

The ministry has argued that based on outcomes of the deregulation of HSD, the margins on petrol would also be deregulated in the next phase. It has, however, conceded that the price of HSD would vary from pump to pump across the country due to the deregulation of margins. It was “expected that people would prefer to buy from the filling stations offering cheaper and efficient product”.

It has not explained how consumers would know which retail outlet or OMC was selling the efficient or better product and if the outlet selling the cheaper product was actually efficient or vice versa. An Ogra official said even the basic premise of revising margins based on CPI was flawed because it would keep increasing returns on every litre regularly. Hypoth­etically, the commission and margin could touch Rs10 per litre in a few years.

The petroleum ministry, however, argued that the deregulation would create an atmosphere of competition as prices would be determined by market forces based on demand and supply. It would circumvent the pressure of dealers to increase their margin for meeting their cost of business. It argued that the deregulation would be subject to the OMCs agreeing to enhance the level of commercial stock/storage from existing 20 days to 30 days of their sale within three years.

The Planning Commission supported the increase in margins on diesel and petrol on the basis of CPI, but opposed the deregulation of HSD without first formulating a “clear-cut downstream oil policy” covering all aspects of refinery, petroleum product logistics, storages, marketing and distribution, including the deregulation of various products. It said any policy change without proper groundwork could be counter-productive.

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