A critical perspective on recent hike in fuel prices – by Ahmed Iqbalabadi

OGRA announced an increase in petroleum products on 31st October. The  increase is for sure going to fuel inflation, something which the whole nation has to endure, however, it is important to realize that why petroleum prices are to be raised. Off course, I need to be incensed at the increase as no one in this world is happy with increase in prices of any commodity. The trickledown effect of fuel price increase is also substantial as transport becomes costly, so does power generation and so does input prices of everything that we consume.

Our media has rightly  refocused its attentions on the matter of mehngai which it has chosen to ignore for mindless issues like NRO, 18th Amendment and Judges Appointment/Restoration/Removal. Not many times do we see focus on inflation or economy. The recent increase in fuel prices has been condemned by all and sundry. I have some points which need pondering from our side:

  1. Petroleum prices were not increased from end of 2006 till March 2008. During that time international oil prices fluctuated causing stress oil importing companies while the government kept on subsidizing the difference between price paid for the product and price received from the consumer. Result was circular debt that kept on ballooning
  2. As the circular debt kept on mounting, electricity prices were not raised. Off course, if the cost of production is higher than price charged, you will see losses ballooning. Also cash flow is affected which causes circular debt to go on increasing
  3. After the petroleum product prices were increased from March 2008 onwards, they  touched an all time high of Rs 86.66 per liter between July and September 2008. When the international oil prices came down, the same prices were brought down to as low as Rs. 56 in March 2009.
  4. In August 2010, International oil prices were hovering around USD 72.5 per barrel which are now at USD 82 or so. We can see an increase of nearly 13%. If oil prices go down from here, we should expect Ogra to reduce the prices of products locally.


Tough Decisions:

As PM, Shaukat Aziz chose to act as an Ostrich

We can choose to remain in denial that prices should be low at all times irrespective of where the product prices are internationally or we can choose to realize that we are living in a world where product prices are no more under the control of governments. When the PPP government took over, the Circular Debt was above Rs. 300 billion in 2008 which has now come down to less than Rs. 200 billion.

Right now the decision would be: to keep on with lower prices and give “some relief” to the “aam aadmi” but at the same time keep on borrowing from State Bank or international agencies to service the difference between the price paid and price charged and thereby increasing the circular debt OR move the prices as per the market prices and stop the ballooning of circular debt.

Off course, it is a tough choice to make. I can choose to do the “Ostrich Algorithm” something which Shaukat Aziz chose to do i.e. Insert his head in the sand as a storm brewed or take a tough decision and reduce my losses. What Shaukat Aziz did by not increasing the prices is something the current government is suffering from i.e. the circular debt.

Choosing not to increase prices is an easy decision but has implications in the long run. One can choose to be selfish by trying to remain popular (something which PML-Q/Pervez Musharraf tried doing) but then temporary relief is always followed by bigger problems. In essence, PML-N or the opposition should be happy that by increasing the prices, the government gets unpopular while at the same time by reducing the circular debt it is them who are  going to benefit if they form a government, ever, that is!!



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