The government has again applied a formula introduced in April to hold down high-speed diesel prices, capping the diesel crack spread at $41.5 a barrel against an international margin of around $68 (Geo News, citing The News).
The effect is a cut of Rs32.63 a litre, taking high-speed diesel from Rs395.69 to Rs363.06. Petrol went the other way, up Rs2.97 from Rs334.54 to Rs337.51 (Daily Times; Business Recorder).
Those starting figures are worth noting on their own: diesel had climbed to Rs395.69 and petrol to Rs334.54 by August 19, having stood at Rs390.42 and Rs331.20 on August 18. Under daily pricing the rates moved again in between.
The mechanism is unusual and worth understanding, because it is not a tax cut. The crack spread is the margin between crude and refined product. Capping it at $41.5 when the international spread is $68 means the four Karachi refineries that produce around 70 per cent of Pakistan’s diesel are absorbing the difference — foregoing profit so the pump price does not follow the world price.
It is the second time since the Iran war began that domestic refineries have agreed to sacrifice part of their margin for consumer relief. The arrangement was finalised in virtual meetings between the petroleum minister, the secretary and the managements of the four refineries, held on the prime minister’s directions. Petroleum Minister Ali Pervez Malik said the prime minister had personally requested it: “I am happy to announce that the refineries have accepted the government’s demand while acknowledging the difficulties.”
The government considered two routes: capping the crack spread, or reducing the gross refinery margin. The refineries preferred the cap.
There are conditions and costs attached. The refineries have sought recovery of the per-barrel premium on imported crude, arguing it must be built into the pricing formula. The cap is to remain only until the Strait of Hormuz situation improves and international markets normalise. And oil marketing companies and dealers holding stock bought at higher prices face substantial losses on inventory that has just been repriced downward beneath them.
The relief is real and large for anyone moving goods. Diesel prices freight, farm machinery and inter-city transport, and had reached Rs390.42 on August 18 after the sharpest single increase of the month.
It also arrives with two constituencies watching. Jamaat-e-Islami is in a fourth day of sit-ins over the petroleum levy, and goods transporters suspended a nine-day strike on the understanding that prices would move fortnightly or monthly rather than daily — an undertaking this revision does not honour, even as it delivers the cut they wanted.
What the arrangement did not involve was any reduction in the government’s own take. The petroleum levy was not cut in this revision; reporting on its exact level diverges, with figures for the diesel levy cited between Rs77.28 and Rs80 a litre in recent revisions, and at least one account saying it rose again on August 20. The relief came from refinery margin, not from tax.
