Daily Times

In recent times, the proposition to deregulate petroleum prices in Pakistan has sparked significant debate. The Oil and Gas Regulatory Authority (OGRA) has put forward this proposal, citing examples from other nations where deregulation has ostensibly led to more competitive markets. However, major stakeholders including refineries, the Oil Marketing Association of Pakistan (OMAP), and the Pakistan Petroleum Dealers Association (PPDA) argue that the necessary groundwork is not yet in place in Pakistan to ensure a smooth transition. They caution that premature deregulation could have catastrophic effects on the industry and ultimately, the consumer.

Deregulation involves removing government controls over pricing, allowing the market forces of supply and demand to determine prices. This approach can increase competition and potentially lower prices. However, it also removes safeguards that protect smaller players in the market and can lead to significant volatility. Countries that have successfully deregulated their petroleum markets, such as Norway and Canada, typically have robust regulatory frameworks and competitive market environments that ensure fair play and prevent monopolistic practices. These countries also provide substantial margins to oil marketing companies (OMCs) and dealers, creating a sustainable business environment. However, comparing these countries directly with Pakistan can be misleading due to the vast differences in economic conditions, regulatory frameworks, and market dynamics.

The petroleum sector in Pakistan grapples with a set of unique challenges that significantly complicate the prospects of deregulation. A primary concern is the volatility of exchange rates, which heavily impacts Oil Marketing Companies (OMCs) by influencing their cost structures in unpredictable ways. Moreover, the delays in adjusting and recovering FX losses add an additional layer of financial strain on these companies.

Another pressing issue is the prevalence of smuggling and illicit trade. The influx of cheaper, smuggled petroleum products, particularly Iranian diesel, significantly undercuts the sales of legal businesses, diminishing their revenue. It’s also important to note that the current profit margins for OMCs and dealers are considerably lower than those in countries with successful deregulation models. This disparity makes it exceedingly challenging for smaller entities to sustain operations in a deregulated environment. Many emerging OMCs have made substantial investments in infrastructure, especially in remote areas. These investments risk becoming nonviable if deregulation allows larger, more established OMCs to dominate the market.

It is worth to mention that Pakistan’s refineries have alsoexpressed significant concerns. The refineries argue that deregulation could destabilize the already fragile oil sector by increasing volatility in petroleum pricing, which could negatively impact their operations and financial stability. They emphasize that the current regulatory framework provides a necessary buffer against the unpredictable swings in international oil prices, which helps maintain a steady supply chain and pricing structure. The refineries also highlight that deregulation could lead to unequal competition, benefiting larger oil marketing companies (OMCs) and potentially driving emerging OMCs out of the market. Consequently, they are advocating for a cautious approach to deregulation, urging OGRA to consider the broader implications on the entire petroleum ecosystem in Pakistan and to engage all stakeholders in a comprehensive dialogue before making any substantive policy changes.

Without meticulous management, deregulation could potentially lead to a monopolistic market where larger OMCs might temporarily lower prices to drive out emerging competitors. Such price instability could ripple across the broader economy, affecting more than just the petroleum sector. In an intensely competitive market, there’s a real risk that companies may compromise on safety and environmental standards to cut costs. Additionally, rural and economically disadvantaged areas could face higher prices and unreliable supplies.

To move towards deregulation responsibly, Pakistan must first reinforce its regulatory frameworks to ensure robust market monitoring and fair practices. Addressing the rampant smuggling and ensuring compliance with international standards are critical to safeguarding legitimate businesses. The government must also foster policies that protect smaller players and encourage fair competition. Comprehensive consultations with stakeholders and educating consumers about the implications of deregulation are crucial steps.

The approach of the Oil and Gas Regulatory Authority (OGRA) towards deregulation appears to predominantly favor the three large Oil Marketing Companies (OMCs) that dominate a significant portion of petroleum product sales. However, it is crucial that OGRA also considers the position of emerging OMCs. These emerging entities have made substantial investments in infrastructure, particularly in remote areas, and have developed new storage facilities to ensure a stable and secure supply of petroleum products—critical for both the economy and national defense of Pakistan.

The potential deregulation raises serious concerns about its broader impacts, particularly the risk of increased unemployment. With the economy already under significant strain, further job losses could exacerbate financial hardships for many Pakistanis and lead to increased social instability. The deregulation of petroleum products, if not managed carefully and inclusively, could lead to dire consequences for those employed within the sector and beyond. It is imperative for OGRA to adopt a more holistic view and ensure that any regulatory changes do not disproportionately harm emergingplayers or the broader economic landscape.

In theory, deregulation can offer benefits, but it requires a conducive environment characterized by strong regulatory oversight and equitable competition. For Pakistan, adopting a cautious and well-considered approach that addresses the unique challenges faced by its petroleum sector is crucial. Rushing into deregulation without laying the proper groundwork could prove detrimental, affecting not only the petroleum sector but also the broader national economy.

(Writer is Chairman Oil Marketing Association of Pakistan)