Daily Fuel Pricing: A Step Towards More Responsive Price Adjustments
Prime Comment #42
On the 17th July, the Federal Cabinet approved a proposal for daily review and notification of fuel prices. Under the updated guidelines, OGRA will determine petrol and fuel pricing using a seven-day rolling average of the international Platts benchmark, import premium, and the prevailing exchange rate. Prices will be updated on weekdays; prices will be the same on Saturday and Sunday. Under this updated framework, OGRA is no longer required to get approval from the Prime Minister or the Minister of Finance before notifying the prices.
The government’s decision to shift to daily fuel price adjustments deserves appreciation. It is consistent with PRIME’s recommendations in its Prime Plus report that “Daily fuel price adjustments, instead of the fortnightly or weekly practice, would improve the price mechanism’s responsiveness to variations in global oil prices.”, as more frequent price revisions enable timely pass-through of international market movements while reducing large price shocks and improving price predictability.
Pakistan’s fuel price comprises seven components: the ex-refinery price, Inland Freight Equaliser Margins (IFEM), OMC’s margin, dealer margin, petroleum development levy (PDL) and climate support levy (CSL).
Currently, both petrol and diesel are exempted from the sales tax with PDL alone accounting for 25% of the retail fuel price. Under the new guidelines, only the ex-refinery components of prices move daily. The OGRA’s breakdown of fuel prices for 21 st July confirms this. Out of the Rs 315.80 per litre price of petrol paid by the consumers, Rs 207.34 (65.6%) is the market-linked ex-refinery cost of petrol. The remaining 34.4% comprises government levies, i.e PDL at Rs 80 and CSL at 5%, totalling Rs 85 per litre and government-fixed margins (IFEM, OMCs and dealers’ margins accounting for Rs 23.46. The pattern is similar for diesel at Rs 360.06: Rs 96.76 is administered, and Rs 263.30 is market-linked.
The adoption of a seven-day rolling average is consistent with the IMF’s guidance that governments may adopt limited price-smoothing mechanisms in the short-run to moderate sharp and temporary increases in domestic fuel prices.The IMF notes that rule-based smoothing helps avoid abrupt retail price shocks, while preserving the automatic adjustment of domestic prices to international market conditions over time.
While the reform does not change the main structure of fuel pricing, it does represent a significant improvement in how prices are adjusted. Daily price adjustments reduce the incentive to hoard fuel or withhold supplies in anticipation of higher prices, thereby limiting opportunities to benefit from abrupt price revisions. This also helps explain why sections of the petroleum retail sector are opposing the daily fuel price adjustment mechanism.