Tuesday, October 7, 2008, Shawwal 7, 1429    

Softening of world oil prices Consumers wait for relief

Amanullah Khan

Karachi—Though oil prices have softened from US$129/bpl in June to US$98 in early Sept for Middle Eastern crude, yet the oil price correction has been absorbed by the government in product subsidy.

The oil prices revision downward or upward has been deferred for another fortnight yet the oil and electricity consumers both industrial and domestic are sitting with their fingers cross in the hope of some relief especially in diesel prices which is mostly used by the lower income strata of the society as well as by the industrial consumers who are highly depressed due to increasing cost of production of the export oriented manufacturing goods.

According to energy experts the high fuel prices and the wider economic crisis have hurt consumption even in top consumer the United States and other major consumers. US crude traded around $93 a barrel on Friday, down over $50 from a record over $147 in July.

The lowering oil prices naturally would have a positive impact on thermal based electricity producers including WAPDA and Independent power producers which justify the pass on the electricity consumers and oil consumers yet there is no sign of any relief for the consumers despite tall claims of poverty reduction relief to the common man.

On the oil Marketing Companies front, softening of oil prices will force downstream oil marketing companies to book losses on inventories. Assuming oil prices would remain at US$85/bbl during financial year 2009, the energy analysts estimate the declining oil pries likely to wipe out PSO’s inventory gains booked in financial year 2008 when oil prices jumped from US$70/bbl to US$129/bbl.

At US$85/bbl for oil, the government is likely to revert to the old formula for regulated marketing margins on diesel and gasoline, i.e., a 3.5% marketing margins on ex-refinery.

The diesel marketing margins as percentage of ex-refinery prices have remained under 2.2% though oil prices have softened from US$129/bbl in June to US$98/bbl in early September for Middle Eastern crude, indicating the oil price correction being absorbed by the government in product subsidy.

It may be recalled that in early August, the government had fixed marketing margins for both gasoline and diesel, assuming oil prices at US$100/ per barrel. However, lower oil price and hence furnace oil price should result in lowering of Wapda’s financial burden and the gradual unwinding of built-up receivables.

Energy experts suggest that it is the need of the hour that cheaper fuel should also allow restocking of fuel inventory, which is at present well below the 21-day required threshold. The national economy currently entangled with its own economic and political challenges, the global recession and soft global commodity prices will mean a mixed impact on Pakistan’s economy.