The International Monetary Fund (IMF) has endorsed a new pricing formula for high-speed diesel in Pakistan, a move that has successfully mitigated windfall gains for oil refineries and reduced diesel costs by Rs100 per litre for the current week. Without this adjusted mechanism, prices would have reached Rs480 per litre, but were instead set at Rs380.2 per litre as announced by Petroleum Minister Ali Pervaiz Malik.
Shift to Crude-Based Pricing
The newly approved mechanism moves away from determining rates based on the average Platts of refined products, opting instead for a formula based on the value of Dubai crude oil. This change follows an internal government review prompted by former finance minister Miftah Ismail regarding windfall gains to refineries.
The federal cabinet approved the pricing mechanism last week for a minimum duration of three months. Under the new rules, the average of the previous week’s Dubai crude oil serves as the base price, while the Aramco crude oil premium for Arab Extra Light for Asia is applied—set at $3 per barrel for April.
To maintain stability, the high-speed diesel crack has been capped at $41.89 per barrel with a floor of $11.33 per barrel, ensuring a historic weighted average crack of $6.16 per barrel.
Budgetary Pressures and Tax Shortfalls
Despite the agreement on diesel pricing, the government is facing significant fiscal challenges. The Federal Board of Revenue (FBR) reported a tax revenue shortfall of Rs610 billion during the first nine months of this fiscal year, impacting the primary budget surplus target of Rs3.4 trillion agreed upon with the IMF.
To offset this deficit, Prime Minister Sharif increased the petroleum levy on petrol by Rs26.77 per litre on Friday. This brings the total levy on petrol to Rs107 per litre, which exceeds the Rs80 per litre limit established by the IMF.
The IMF had initially suggested a windfall tax to recover the difference between imported and locally refined diesel to fund subsidies. Still, the government rejected this proposal, citing the absence of a foolproof mechanism to ensure the funds reached their intended purpose.
Managing the Middle East Crisis
The pricing volatility is a direct result of the war that began on February 28 and the continued blockade of the Strait of Hormuz. Petroleum Minister Ali Pervaiz Malik noted that “prompt decision making, diplomatic support and strong leadership” prevented any dry-out incidents despite low reserves.
Minister Malik credited Deputy Prime Minister Ishaq Dar and Field Marshal Asim Munir for their support in securing alternate supply routes through diplomatic channels to avoid fuel shortages.
Future Sector Outlook
Once the Middle East crisis concludes, the government may move the oil sector toward full deregulation. Possible next steps include the upgrading of refineries and the transformation of the Oil and Gas Regulatory Authority (Ogra) into a modern regulator utilizing digital tools.
The current wartime pricing formula is set for three months, though it could be extended further subject to the consent of all involved parties.
Frequently Asked Questions
How does the new diesel pricing formula differ from the previous one?
The new formula is based on the value of Dubai crude oil rather than the average Platts of refined products.
Why did the government increase the petroleum levy on petrol?
The levy was increased to offset a Rs610 billion shortfall in FBR tax revenues during the first nine months of the fiscal year to help meet the primary budget surplus target.
What was the IMF’s alternative suggestion for managing diesel prices?
The IMF initially proposed imposing a windfall tax on the difference between imported and locally refined diesel to fund price subsidies.
Do you believe a shift toward full deregulation of the oil sector is the right move for long-term price stability?
