Explainer: Who Controls Petroleum Prices?

Across the globe, oil remains a key component of the energy mix. In countries where crude oil is found in large quantities, they sell it to other countries, such as Saudi Arabia, UAE, Russia and Kuwait etc.

Not every country in the World produces enough oil, that’s why they purchase it from the oil giants to fulfill their country’s needs. Fuel has an inelastic demand, especially for those of us who consume it to drive our motorbikes and cars daily.

Currently there are three oil giants in World, USA, Russia and OPEC (Organization of Petroleum Exporting Countries).

OPEC is the main influencer of fluctuations in oil prices. The organization comprises 15 member countries namely Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

But how petrol price fluctuates in Pakistan so often? Let’s take a closer look.

Ex-Refinery Price

Ex-refinery price is the amount at which local refineries sell their finished inventories of petrol and diesel to the  Oil Marketing Companies (OMCs). It is calculated by the Oil and Gas Regulatory Authority (OGRA) using a formula where import parity price is determined after taking an average of past 15-day international prices.

Inland Freight Equalization Margin (IFEM)

In order to equalize the prices throughout the country, the Inland Freight Equalization Margin (IFEM) mechanism is used by the Oil and Gas Regulatory Authority (OGRA).

Distributor Margin

This is the maximum margin OMCs earn per liter of petrol. It is regulated by the Government of Pakistan and can be altered by the government as and when required.

Petroleum Development Levy (PDL) & GST

An amount collected as tax by GoP. Both of these are a form of tax that goes to the government. In December, the government charged approximately Rs23 per liter on petrol and Rs16 per liter on diesel from the consumers in the form of PDL and GST. However, currently, the government is not charging any petroleum levy or sales tax; recently, in order to minimize the effects of high oil prices in the international markets on the consumers, the government has implemented a subsidy of 41.43 and 24.07 on diesel and PMG respectively.

Dealer Commission

The gross margin earned by the owner of a petrol station on every liter on sales of petroleum products.

Secondary Freight

The secondary freight component is a part of the POL price structure. It is directly proportional to the delivery point (distance traveled) from the supply point (terminal).

Takeaway

Many people thinks that the government charges high fuel prices because they want to collect revenues through petroleum levy and sales tax. But a close examination of the key components of fuel prices dispels this impression. The government allows refiners, OMCs, and dealers to earn a small margin while a major part of the price relates to the international oil prices.