The world oil market is quite unpredictable and volatile. Prices of gasoline and other related products are generally on the rise around the world as the cost of exploring, producing and refining oil is increasing and the world’s major oil producing countries are using their oil wealth to boast about their strategic global significance. When this happens, such countries also develop a political clout to which attention is paid by other nations.

Like many other countries, Pakistan also suffers from the phenomenon of not being a full-fledged oil-producing country. As things stand, prices of oil products in Pakistan face the same rise and fall in the oil prices tide as other nations. However the POL (petrol, oil and lubricants) customer in the country also faces an additional cost element (also prevalent in many other countries) called IFEM - Inland Freight Equalization Margin. In Pakistan, IFEM is incorporated in the structure of oil products at all times. Through the IFEM formula, it is possible for the government to set a single price for different oil products across the country at any given time. For example, if gasoline is available at a certain price in Karachi, it is sold at the same price in Peshawar or Chitral – and everywhere else in the country.

The oil prices in Pakistan are regulated by the government and OGRA (Oil and Gas Regulatory Authority) and there is a fixed margin that is paid to the distributor (the oil marketing company or OMC). As indicated earlier, Pakistan’s oil industry is heavily import-dependent. The country imports around 60% of its entire oil requirements – in the form of crude oil as well as refined and finished POL products.

It has been traditional for oil marketing companies in Pakistan to incorporate IFEM into the price of various POL products sold at retail outlets across the country. A set pricing formula for these products is observed so that POL prices do not vary anywhere in the country. The price that is charged to the petrol products customer at any given time or place comprises the following components: cost of the fuel as charged by the refinery, government levies and taxes, IFEM, and commissions charged by dealers and distributors. The price of any petrol product, after combining all these factors, is always uniform across the nation. This is the purpose of IFEM - to uniformly maintain the prices of all petroleum products - petrol, high-speed diesel, light diesel oil and kerosene.

However, if there is a change and the government’s or OGRA’s formula concerning IFEM is not applied, the prices of POL will be lesser at places located near refineries and will gradually increase at locations moving further away from refineries. This is because the transportation cost of the fuel will kick in and increase the cost for the oil marketing companies (such as PSO, Byco, Shell, Total, etc.) in deliveries made to these locations. In real terms, if the POL products are picked from a refinery in Karachi and delivered to retail outlets within or around the city, the cost of the product would be much lower – say Rs. 100.00 for a litre of gasoline. The transportation cost will begin to increase as the POL delivery vehicle moves outside Karachi, to Hyderabad, Sukkur, Multan, Quetta, Lahore, Islamabad, Peshawar, Gilgit, etc.

This places extra pressure on the oil marketing companies but since they are bound to maintain the oil pricing formula (which includes IFEM) as recommended by OGRA, they have to absorb the cost in the retail price. It is the POL-purchasing public that suffers in the end, because wherever the customer is located, whether in Karachi or Gilgit, he is required to pay the same price for a litre of gasoline everywhere in the country.

If there were no requirement for the enforcement of a standardized formula across Pakistan, the customer would be paying different prices for a litre of gasoline in Karachi, Hyderabad, Lahore, Gilgit or elsewhere. In the interest of providing a level playing field and fair price competition, there are strong grounds that the IFEM formula should not be incorporated in the POL pricing structure that is currently followed by oil marketing companies under OGRA recommendations. When IFEM is removed, the initial impact would be that POL prices will be lower at those points in the country where the oil refineries are located and from where POL products are lifted for delivery at retail outlets (filling stations). This is the mechanism followed in many countries around the world, including the United States.

Removal of IFEM would mean that the variety in transportation costs of POL products delivery that the OMCs sustain at present and merge into the nationwide uniformity of prices of POL products would end. This would mean that consumers of POL products would pay different prices at different locations. Customers in Karachi would be paying a lower price while customers in places that are away from the refineries would be paying a higher price. As the distance of the retail outlet increases from the refinery, the prices of POL products would become higher.

Many quarters have asked the government to do away with the concept of IFEM and eliminate the freight equalization margin so that the accruing benefits can be passed on to the consumer. As it is, the ‘equalization’ cost was never meant to be a source of profit for oil refineries and oil marketing companies. If IFEM is abolished, consumers in all big cities will benefit because the prices at many oil distribution depots will be reduced. However, prices in remote areas such as Azad Kashmir, Chitral and Gilgit-Baltistan would increase. Consumers will then have to bear a significantly higher burden. However, the good thing is that these higher prices would be subsidized directly by the government on the basis of consumption volume and transportation cost.

The removal of IFEM will lead to greater competition among oil marketing companies and refineries to use the cheapest mode of transportation and this would result in lower prices at the consumer level. It would also curb malpractices related to tax refunds, sale of fake products and dumping.

The writer is a Communication Specialist based in Islamabad.

You can reach me @ alamg33r@gmail.com