ISLAMABAD: Pakistan’s oil industry has firmly opposed proposals to replace the existing fuel pricing mechanism with a guaranteed return model, cautioning that such a shift would effectively require year-round government subsidies and strain public finances.
Industry stakeholders argue that the current pricing framework—linked to international benchmarks—is globally accepted and ensures alignment with market dynamics. They warn that abandoning this system in favour of guaranteed returns would reverse reform efforts and create unsustainable fiscal liabilities, particularly in light of guidance from institutions like the International Monetary Fund, which discourages open-ended subsidy regimes.
Officials noted that Pakistan’s refineries have collectively incurred losses exceeding Rs100 billion in recent years, underscoring the sector’s structural challenges. Despite its strategic importance, refining remains a low-return, capital-intensive business with margins that are highly cyclical and often under pressure.
Industry representatives stressed that recent calls for policy changes are based on short-term market movements, rather than a comprehensive understanding of refinery economics. They highlighted that most refinery products—including furnace oil, gasoline, and bitumen—frequently trade below crude parity, eroding overall profitability even when select products show temporary gains.
They also pointed out that the actual cost of crude oil extends beyond benchmark prices, incorporating freight, insurance, duties, and financing costs—all of which have surged amid current geopolitical tensions. Rising war-risk premiums and higher cargo values have significantly increased working capital requirements, further squeezing margins.
Contrary to perceptions of windfall gains, the industry argued that upstream exploration and production companies benefit more during periods of high prices, as they sell oil and gas at internationally benchmarked rates. A substantial portion of this sector is government-owned, meaning increased revenues directly boost public finances and tax collection through entities like the Federal Board of Revenue.
The industry also raised concerns over policy inconsistency, noting that refineries are expected to operate under market-based pricing during downturns but face calls for intervention during brief periods of improved margins. Such selective policymaking, they warned, could undermine investor confidence and distort incentives in an already constrained sector.
Emphasising the critical role of refining in Pakistan’s energy supply chain, stakeholders urged policymakers to adopt a long-term, data-driven approach. They cautioned that reactive measures driven by short-term considerations may offer temporary relief but pose serious risks to energy security and future investment.
Story by ZAFAR BHUTTA
