In Pakistan, the consumer price of petrol (and other petroleum products) is set by the government through a process that involves several key steps and stakeholders. Here is an overview of the process:
1. International Crude Oil Prices: The base price of petrol is influenced by international crude oil prices. Pakistan imports a significant portion of its crude oil and refined petroleum products, so fluctuations in global oil prices directly impact the cost.
2. Exchange Rate: The value of the Pakistani Rupee against the US Dollar affects the price, as petroleum imports are priced in dollars. A devaluation of the Rupee will increase the cost of petroleum products.
3. Refining and Import Costs: The price also includes costs incurred by refineries and importers for refining crude oil or importing refined products. This includes freight charges, insurance, and other related expenses.
4. Government Taxes and Levies:
– Petroleum Development Levy (PDL): The government imposes a levy on petroleum products, which is a significant component of the retail price.
– General Sales Tax (GST): GST is applied to the final consumer price of petroleum products. The rate of GST can vary depending on government policy.
– Customs Duty: This is applied on the import of petroleum products and is passed on to consumers.
5. Oil Marketing Companies (OMCs) Margins: OMCs are allowed a certain margin by the government to cover their operational costs and profit. This margin is regulated and forms a part of the final price.
6. Dealer Commission: Petrol pump dealers also receive a commission for selling petrol, which is included in the retail price.
7. OGRA’s Role: The Oil and Gas Regulatory Authority (OGRA) plays a central role in the price-setting mechanism. OGRA makes recommendations to the government based on various factors like international prices, import costs, and exchange rates.
8. Final Approval by the Ministry of Finance: After receiving recommendations from OGRA, the Ministry of Finance, in consultation with the Prime Minister’s Office, gives the final approval for any price adjustment. The government may decide to pass the full impact of international price changes to consumers or absorb part of it by adjusting taxes and levies.
9. Price Revision Schedule: Petrol prices in Pakistan are usually reviewed every fortnight (15 days). The revised prices are then announced by the government and implemented by oil marketing companies and dealers.
This price-setting mechanism is influenced by both global market conditions and domestic fiscal policies, and it has a significant impact on inflation and the overall economy.
Example:
Let’s go through an example of how petrol price fixation in Pakistan might work, using hypothetical numbers to illustrate the various components involved in setting the consumer price.
Example Scenario: Petrol Price Fixation in Pakistan
Assumptions:
– International crude oil price: $80 per barrel (1 barrel = 159 liters)
– Exchange rate: 1 USD = PKR 300
– Refinery costs, import duties, and OMC margins as per typical regulatory standards
– Petroleum Development Levy (PDL) and General Sales Tax (GST) rates set by the government
Step-by-Step Calculation
1. International Crude Oil Price:
– Crude oil price per barrel = $80
– Price per liter in USD = $80 / 159 liters = $0.50 per liter
– Price per liter in PKR = $0.50 × 300 (exchange rate) = PKR 150 per liter
2. Refinery Costs & Import Parity Price (IPP):
– Assume refinery and transportation costs add PKR 20 per liter.
– The import parity price (IPP) = PKR 150 (base price) + PKR 20 (refinery/transport costs) = PKR 170 per liter.
3. Petroleum Development Levy (PDL):
– The government imposes a PDL, which is a fixed charge per liter. For this example, assume the PDL is PKR 50 per liter.
– Price after PDL = PKR 170 + PKR 50 = PKR 220 per liter.
4. General Sales Tax (GST):
– GST is applied on the price inclusive of the PDL. Assume the GST rate is 17%.
– GST = 17% of PKR 220 = PKR 37.40 per liter.
– Price after GST = PKR 220 + PKR 37.40 = PKR 257.40 per liter.
5. Oil Marketing Companies (OMCs) Margin:
– OMCs are allowed a margin to cover their costs and profit. Assume this margin is PKR 4 per liter.
– Price after OMC margin = PKR 257.40 + PKR 4 = PKR 261.40 per liter.
6. Dealer Commission:
– Petrol station dealers receive a commission for selling petrol. Assume the dealer commission is PKR 3 per liter.
– Final consumer price = PKR 261.40 + PKR 3 = PKR 264.40 per liter.
Summary Breakdown:
– Base Price (international crude oil + refining/transport costs): PKR 170 per liter
– Petroleum Development Levy (PDL): PKR 50 per liter
– General Sales Tax (GST): PKR 37.40 per liter
– OMC Margin: PKR 4 per liter
– Dealer Commission: PKR 3 per liter
– Final Consumer Price: PKR 264.40 per liter
Conclusion:
In this example, the final price of petrol at the pump would be PKR 264.40 per liter, which reflects the combined impact of international oil prices, taxes, government levies, and profit margins for oil marketing companies and dealers.
This price would be subject to fortnightly review based on changes in global oil prices, exchange rates, and government tax policies.
