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Fuel prices expected to rise: Pump owners rejoice as millions tighten their belts

Ibraheem Sohail

Nov 13

Pump owners are preparing to celebrate, as oil companies have allegedly submitted a proposal to the Oil & Gas Regulatory Authority (OGRA) to revise fuel prices. However, this spells bad news for travel buses and apps like Yango, which might see a hike in their fare.

 

Reportedly, petrol prices are expected to be revised by 2.5 rupees per litre, kerosene oil by 5.54 rupees per litre, and light diesel oil (LDO) by 5.9 rupees per litre and the most significant of all, High-speed diesel (HSD) by 5.91 rupees.

 

Experts are claiming that the reason behind the projected rise in price is an increase in petroleum prices in the international market. Since imports cover 80 per cent of the domestic demand for oil, Pakistan is highly vulnerable to the ever-changing oil prices.

 

However, if that were true, prices should have dropped instead because, in the last month, the price of oil has dropped by a quarter in the international market. It is, therefore, unlikely that the primary motivation behind the expected rise in local prices is linked to global prices.

 

An alternate explanation could be Islamabad’s crackdown against the illegal smuggling of diesel across the Pakistan-Iran border. This could increase demand at local fuel stations as Iranian diesel ceases to be sold in the black market. The crackdown against smuggling will undoubtedly greatly increase the profit margins of local fuel stations as they will see more traffic flowing through them now.

 

It is to be noted that fuel is a good that is inelastic in demand. Simply put, any hikes in fuel prices are not likely to cause a reduction in consumption as it is considered a necessity. Moreover, it is unlikely that vehicles are utilizing multiple fuel sources (barring the age-old combination of Petrol-CNG), which makes it impossible to switch to a cheaper alternative.

 

It is this very principle that will allow business owners involved in the trade of fuel to benefit from the expected rise in prices – as prices of each barrel of crude oil have actually fallen by 25 per cent in the last month.

 

However, these profits will come at the cost of the rest of the economy. People will still have to consume petrol and other such products regularly. The higher prices will result in a decline in the purchasing power of customers. This would spell bad news for non-fuel businesses, as a higher proportion of the consumer budget would be allocated towards the purchase of fuel, which would mean fewer revenues for non-fuel businesses.

 

This is likely to cause businesses to suffer as their customers will have less money to spend on their products.

 

Moreover, businesses are expected to suffer as transport costs of goods from warehouses to stores will rise. Businesses will either have to absorb these extra costs, resulting in a drop in profits, or this additional cost will have to be passed onto consumers in the form of higher prices, resulting in a rise in inflation.

 

While it’s not a win either for businesses or customers, it's great news for businesses trading fuel. It will also be interesting to note whether the tax levied on fuel by the government sees a change or not as IMF conditions continue to remain unmet. The answer will be unfurled by the winds of time.

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