POL prices hike sparks criticism, petroleum industry explains pricing mechanism

ISLAMABAD: Pakistan’s petroleum industry is facing criticism for allegedly making huge profits amid the ongoing conflict in the Middle East and its impact on domestic fuel prices, after the government abruptly increased petrol and high-speed diesel prices by Rs55 per litre.
Social media users claim that oil marketing companies are pocketing massive profits on fuel cargoes that had already landed in the country before the price increase. The government is also facing criticism, with some users recalling statements made by the PML-N during the Imran Khan government, when party leaders had said that an increase in petrol prices meant the prime minister was “a thief.”
However, the petroleum industry has defended the existing pricing mechanism for petroleum products (POL), arguing that the perception of large “inventory profits” is based on a misunderstanding of how fuel pricing works in Pakistan.
According to industry officials, petroleum product prices are determined using the average Platts benchmark prices for petrol and diesel during the pricing period, along with exchange rate adjustments. The price is not linked to the cost of a specific cargo imported weeks earlier.
They further explained that oil companies are legally required by the Oil and Gas Regulatory Authority (OGRA) to maintain around 20 days of mandatory stock, a requirement that has recently increased due to regional tensions.
As a result, companies continuously sell fuel while simultaneously importing new cargoes at prevailing international prices to replenish their inventories.
“When a litre of fuel is sold today, it has to be replaced with a litre purchased at current international prices,” an industry source said, adding that what appears to be an “inventory gain” effectively disappears because the stock must be replenished with more expensive fuel.
Industry representatives also noted that the reverse situation occurs frequently when international prices decline.
For instance, in December, petrol prices in Pakistan were reduced by around Rs24 per litre following a drop in international prices. At that time, refineries and oil marketing companies were holding mandatory inventories purchased at higher prices, resulting in billions of rupees in inventory losses.
Similar situations occurred in 2022 and 2023, when multiple price reductions forced companies to sell higher-cost inventory at lower regulated prices.
According to industry officials, this is an inherent feature of a pass-through pricing system with mandatory inventory requirements, where companies may occasionally experience temporary gains but often face significant losses when global prices decline.
“It is not a windfall profit from cheap oil bought earlier,” industry sources maintained. Ends