As of 15th September, Pakistan’s petrol price stands at Rs 380.24 per litre and diesel at Rs 409.42. With fuel prices remaining elevated, the question is: how effectively fuel prices in Pakistan actually reflect international market prices?
Since July 2026, OGRA has been determining ex-refinery prices daily based on a seven-day rolling average of the Platts Arab Gulf benchmark, the import premium, and the SBP exchange rate. The current pricing mechanism broadly follows the international market movement. However, the answer to the elevated fuel prices in Pakistan lies in the remaining components of the formula. The higher pump price is partly explained by domestic components. On 1st September, ECC increased the dealer’s margin by 15.5%, from Rs 8.64 to Rs 9.98 per litre, while an increase of Rs 1.22 in OMC margin is conditional on meeting the digitisation targets. Although these margins are CPI-indexed, they ultimately contribute to the pump prices irrespective of the changes in worldwide crude oil prices.
However, within the fuel pricing mechanism, the Petroleum Development Levy (PDL) remains the component in need of reform. The levy, currently fixed at Rs 80 per litre for both diesel and petrol, has been in place since 1961. The Petroleum Development Levy has recently become the centre of the political debate over fuel prices. Jamaat-e-Islami has demanded its complete abolition, arguing that removing the levy would provide substantial relief to consumers. However, this argument ignores an important distinction. The problem is not simply the existence of a levy on petroleum products, but the way it is structured. Pakistan is not the only country to tax fuel. India combines central excise duties with state-level VAT, much of which is levied ad valorem, while Bangladesh applies a 15% VAT alongside customs duties and advance income tax. Kenya, in addition to VAT and excise duty, also operates a Petroleum Development Levy Fund through PDL that can be used to stabilise prices when import costs remain elevated. The policy debate should therefore move beyond whether petroleum should be taxed and focus on how the tax is designed and how effectively it allows changes in international prices to pass through to consumers.
Rather than abolishing the PDL, the government should reform its structure. Replacing the fixed Rs 80 charge with an 18% ad valorem levy, broadly consistent with the standard GST rate, would allow the tax burden to move with fuel prices. For example, at a petrol price of Rs 380.24 per litre, removing the existing Rs 80 PDL gives a price before PDL and Climate Support Levy (CSL) of 295.24. Applying an 18% levy to this amount would result in a PDL of approximately Rs 53.14 per litre: Rs 295.24 × 18% = Rs 53.14. So after adding Rs 53.14 as PDL and Rs 5 as CSL, the resulting price will be Rs 353.38 per litre. An Ad valorem levy will increase and decrease with the underlying fuel price. When international prices decline, the levy would also fall, allowing consumers to benefit more fully from lower prices while preserving an important source of government revenue.