Understanding the Petroleum Scam in Pakistan

I share with you a very interesting article published in The News yesterday discussing the controversial issue of the fluctuating price of oil, though it is an undeniable fact that we are intrinsically linked to the price of oil as prescribed by OPEC but somehow the varied fluctuations have never correlated with the international market, we have seen a rise in the price of oil even when the international markets were on the downhill. At the moment the international market is touching astronomical levels and we will soon see an upward trend of the local prices as well. I must give credit to Dr. Farrukh Malik to have taken on this rumbling giant to at least provide us with a short and digestible analysis

by Dr Farrukh Saleem
Published in The News on January 27 2008

In May 2006, the international price of oil hovered around $66 per barrel (OPEC Basket). On January 2, oil in New York was traded at $100 per barrel (NYMEX) while OPEC Basket was quoted at around $90 per barrel (remember, in January 1999, oil had hit a low of $11 per barrel).

Yes, in May 2006 the price of diesel in Pakistan was Rs37.18 per litre. Yes, Shell Pakistan is still selling diesel at Rs37.73 per litre. In effect, the price of oil in the international market has gone up by a whopping 40 per cent but the government of Pakistan is providing diesel to Pakistanis at rates lower than the international market (India hasn’t increased the price of petrol and diesel in 18 months).

We all know that our government has absolutely no control over the international price of oil. What we must also recognize is that Pakistan’s oil industry is a cartel and the best thing that a cartel does is rip off consumers. Our oil cartel essentially has nine major members and 169 million consumers to be ripped off. Our oil industry is oligopolistic in nature; from Greek ‘few seller’, many buyers and an inelastic demand (quantity of oil demanded by consumers changes little with a price increase).

Here are the nine major members of the oil cartel: Pakistan State Oil (PSO), Pak-Arab Refinery (PARCO), Attock Refinery Limited (ARL), Attock Petroleum, National Refinery Limited (NRL), Pakistan Refinery (PRL), Chevron/Caltex, Shell Pakistan and Total-PARCO. They own each other, they sit on each others’ boards and they own projects jointly. ARL, Attock Petreleum and NRL are all owned by the Attock Group. PSO, Shell and Caltex own PRL jointly. The government of Pakistan owns 60 per cent of PARCO while Total and PARCO are partners.

Here’s how 169 million consumers are being ripped off:

One, no refinery in Pakistan is technically capable of producing 0.5 per cent sulphur diesel (emission control standards in Europe and North America now require refineries to produce ultra low sulphur diesel). All that our refineries produce is 1 per cent sulphur diesel. In essence, Pakistani consumers are being supplied an inferior quality product at the price of a superior product. The average differential in price–between 0.5 per cent sulphur diesel and 1 per cent sulphur diesel–is $18 per ton. Pakistani consumers are being ripped off a hefty Rs4 billion a year.

Two, in November 1999, the freight component on a litre of diesel fuel stood at Rs0.65. In December 2004, ‘Inland Freight’ on HOBC amounted to a scandalous Rs12.24 a litre. Someone is making truckloads of money because transporting a litre of gasoline should not be costing more than Rs0.30.

Three, in July 2002, the government of Pakistan allowed refineries to impose a 5 to 10 per cent ‘deemed duty’ in order to create a special reserve for the purpose of upgrading. The refineries have sucked up Rs18 billion from Pakistani consumers but not a rupee has been spent on up-gradation.

Four, since 2001, the government of Pakistan has been collecting an average of Rs40 billion to Rs50 billion a year in the form of ‘Petroleum Development Levy’ to be used for the stabilization of prices in future years. That reserve should have crossed Rs200 billion (the levy was ended in 2005). Can anyone please tell me where that reserve is?

Five, refining margins charged by Pakistani refineries are, in some cases, twice as high as being charged by refineries outside Pakistan. The cartel has served its members well. Look at who is making millions if not billions: PARCO made Rs1.2 billion in 2000-01 and now makes in excess of Rs10 billion. NRL has gone from a meagre Rs23 million in 2000-01 to Rs4 billion. ARL has gone from making Rs29 million in 2000-01 to Rs1.7 billion.

Yes, Pakistan’s oil cartel is now demanding from the government a colossal Rs49 billion as ‘Price Differential Claim’. Yes, Pakistani consumers would have to pay more because the international price has gone up. But, governments around the world support consumers, not cartels. We are special. Governments around the world break cartels. We are special.