LAST Friday was a bombshell by any definition and a Rs55 per litre price hike is a killer for the common citizenry. Sharp adjustments like this always trigger equally sharp politics. But this is the first time I have seen a government move with such speed, and pre-emptive intention, to adjust oil prices at the pump even before the instability has entered our oil supply chain.
Maybe it was possible to do this better, but the fact that a sharp upward adjustment was coming was unavoidable. In the wake of the price hike, a number of observations circulated. Let me address one of them in particular.
People shared a graphic showing fuel price hikes in various countries around the world which showed Pakistan at the top. Why did Pakistan pass such a massive price increase compared to all other countries, including India, Bangladesh and Sri Lanka?
Let’s start with the regional countries. India has elections coming up in four important states in the month of May and a history of governments being reticent about adjusting fuel prices in the run-up to elections. Second, India has a strategic reserve of oil, which when combined with the commercial stocks held by oil marketing companies, gives them 74 days of import cover. By contrast, Pakistan has stocks barely enough for 28 days of cover, and no strategic reserve to cushion the impact of supply disruptions. According to reports from India, the oil sector is currently bearing a loss of INR20 per litre (Rs60) on every sale.
Pakistan stands out in the region as a country that moved rapidly to preserve the integrity of its fuel supply chain.
Bangladesh has a newly minted government that just entered power in February after campaigning on providing relief to the people following a few years of inflation. Passing a 20 per cent hike in essential fuels so soon after entering power, and in the month of Ramazan with Eid looming, would be a wrecking ball to their political prospects at the very outset. This government thinks it can subsidise fuel and ride out the price hike till end April, according to their minister, and it fended off demands from their oil companies last week to raise prices because panic buying had already begun.
According to reports from that meeting last week, Bangladesh’s oil marketing companies were losing Tk74 per litre (Rs169) on their sale of HSD. On Wednesday their oil dealers held an emergency press conference in Dhaka, saying they will need to close their pumps because they are not getting supplies in quantities sufficient to meet the panic buying that has erupted in the country; fights are breaking out at pumps as they try to enforce rationing measures on the buyers.
Bangladesh’s new government is in the middle of trying to negotiate a new tranche from its IMF programme signed in 2023, and it remains to be seen whether they can keep their fuel supply chain running, with the Fund programme on track while absorbing the kind of losses they are trying to take. They now run the risk of landing up in an even worse situation, with state-owned oil companies having run up massive losses that the state needs to cover either through fresh revenue measures, or from the consumers, and at the same time, passing through large price increases in one jolt like Pakistan did, while also facing the prospect of a breakdown in the oil supply chain. And this while the IMF is pressuring them to reduce a $4 billion subsidy bill that has already piled up in the power sector. Add the problems in oil prices and the new government is going to have a very hard time soon explaining why it cannot deliver on its campaign promise to provide relief to the people.
Sri Lanka has similarly been in panic mode since the prices began to rise. At first they announced they will not change prices, then on Wednesday they suddenly backed away from that promise and announced an LKR25 and LKR22 increase in petrol and diesel (Rs23 and Rs20), triggering acrimonious politics amid the prospect of more hikes to come. Like Bangladesh, they too have seen panic buying at the pumps and had to launch aggressive crackdowns as early as March 2 (that’s three days after the start of the war) against hoarding.
Pakistan stands out in the region as a country that moved rapidly to preserve the integrity of its fuel supply chain by passing a massive increase in prices upfront. There is no panic buying in the country, and four cargoes of petrol have docked in the last eight days alone. If there is a problem, it is with diesel because it does not seem to be available in international markets and the wheat harvest season is coming up. Demand for diesel shoots up in Pakistan, India, Bangladesh and Sri Lanka because their harvest seasons more or less align with each other. If diesel stocks run low, Pakistan could see secondary inflation shocks from the harvest time because the resultant price increase will be factored into the wheat price.
If anything, what this episode highlights is how vulnerable Pakistan is to supply disruptions because of its miniscule oil reserves. The country had decided back in the 1990s to build a strategic oil reserve but has failed to do it. India has a strategic reserve and its fiscal position allows it to take risks with oil pricing decisions. Bangladesh and Sri Lanka maintain higher coverage with their commercial oil stocks than Pakistan does. This war should be a wake-up call for Pakistan that safeguarding the integrity of its oil supply chain requires proactive measures and not reactive ones alone. A strategic reserve, coupled with larger commercial inventories for private oil companies, should be a priority for the government once this war passes. But those countries that are trying to absorb the oil price hike in global markets without passing them through are not doing themselves any favours. They will find this out soon
Comments
Post a Comment