Petro problems pile up
They hesitate to make risky Petro choices out of concern for their political standing and the public’s opinion. Yet history has shown that this strategy is ineffective, making the current problems worse and eventually doing a lot of harm to the voters.
Analysts, specialists, and members of the petroleum business have been warning of a catastrophe in the sector for the past six months. The introduction of Letters of Credit (LC) and other concerns had already caused problems for the oil sector.
Sadly, nothing major was done in response to these cautions, and the issue has only gotten worse.
The severe depreciation of the Pakistani rupee has been identified as one of the main factors causing the crisis. The rupee’s value versus the US dollar has fallen precipitously in recent months, from Rs260 at the end of February to over Rs279 at the moment. It’s thought that the unofficial rate is significantly higher
The rupee was trading at Rs179 versus the US dollar at the same time last year, in sharp contrast. The petroleum sector, which includes both refineries and oil marketing corporations (OMCs), has suffered significant losses as a result of the currency’s precipitous collapse.
The in-land freight equalization margin (IFEM), a component of the final pump pricing, is a mechanism through which the oil sector can recoup losses. Reports indicate that the government may not be properly executing it, though.
Instead, a staged approach is being used by the authorities, and even then, not all of the costs are being passed down to the customer. This strategy’s justification seems to be to prevent further increases in fuel prices at petrol stations. Considering the difficulties the petroleum sector is now facing, officials don’t seem particularly interested in finding a solution.
The exchange losses suffered by the oil industry may increase as the Pakistani rupee continues to deteriorate and no practical solution is in sight. This would simply intensify the sector’s already intense financial difficulties.
In addition to the currency rate problem, the petroleum industry is having trouble acquiring crude oil and petroleum products because, as was previously said, it is challenging to open LCs and get confirmation from foreign banks.
After Pakistan’s recent rating drop, this issue could get more difficult.
In addition, the petroleum industry is also dealing with diminishing sales that are the result of both high fuel prices at the pump and a slowdown in economic activity.
According to statistics from the Oil Companies Advisory Council, the OMCs have seen a 19% decrease in sales of petroleum products in the first eight months of the current financial year compared to the same period last year (OCAC).
The recent hike in interest rates by the State Bank of Pakistan is also anticipated to hurt the industry’s bottom line because it would raise borrowing expenses.
Several issues that the petroleum business is experiencing have come together to form a perfect storm. It is therefore not unexpected that some businesses are refraining from importing petroleum to avoid significant currency losses and LC-related issues. There might be a gasoline catastrophe if this tendency keeps on.
It appears that the administration is either ignorant of or unconcerned about the probable effects of the collapse of the petroleum sector on the overall economy and the populace.
Due to the crucial role fuel plays in the operation of the economy, the effects of a downturn in the industry and a disruption in the supply chain of refined petroleum products like petrol and diesel would be felt across many industries.
The continual supply of gasoline is essential for the proper operation of almost all sectors, including logistics, FMCGs, and transportation.
This time, a gasoline shortage might have a severe impact on the agricultural industry because the next wheat harvest season normally sees a rise in demand for diesel.
When there is a gasoline scarcity during a time of high demand, this might result in hoarding and black marketing, which raises the cost of conducting business. Companies may increase prices to pass these expenses on to customers, fueling inflation. The victims of this circumstance will inevitably be the customers.
Instead of using drastic measures that may ultimately damage the economy and cause hardship for the populace, the government must come up with more practical ways to protect consumers from the damaging impacts of inflation.
Creating a clear mechanism that permits pricing changes in the future while protecting the sector from huge currency losses is one possible strategy.
The government must move swiftly to address the problems affecting the petroleum sector, including LC complexities, a method for recouping foreign exchange losses, and other persistent roadblocks that have stymied the industry’s development.
They include strengthening banking services to offset the depreciation of the rupee and rising commodity prices on global markets, resolving the boiler oil issue, and enacting business-friendly legislation to promote investment.