ISLAMABAD:
The oil industry has ruled out making money through old inventory following a massive increase in prices of petrol and diesel.
Industry officials said that the assumption that companies were making a massive “inventory profit” was based on a misunderstanding of how fuel pricing and inventory actually worked in Pakistan.
Fuel prices are determined using the average Platts benchmark prices of petrol and diesel during the pricing period, along with exchange rate adjustments. The price is not based on the cost of a particular shipment purchased weeks earlier.
At the same time, oil companies are legally required by the Oil and Gas Regulatory Authority (Ogra) to maintain around 20 days of mandatory stocks (and recently even higher due to regional tensions). This means companies are continuously selling fuel while simultaneously buying new cargo at prevailing international prices to replenish their inventory.
“So, when a litre of fuel is sold today, it must be replaced with a litre purchased at current international prices. What people describe as an inventory gain disappears because the stock is being replenished with more expensive molecules.”
In fact, according to the industry, the opposite situation is faced quite often. When international prices fall, companies are forced to sell inventory purchased at higher prices at lower regulated rates, resulting in significant inventory losses.
Quoting an example, industry officials said that in December, petrol prices in Pakistan were reduced by around Rs24 per litre after international prices declined. Refineries and oil marketing companies (OMCs) were holding mandatory inventory purchased at higher prices, which caused billions of rupees in inventory losses.
Similar situations occurred in 2022 and 2023, when multiple price cuts forced companies to sell higher-cost inventory at lower prices.
“This is simply how a pass-through pricing system with mandatory inventory requirements works. Sometimes the adjustment may look like a temporary gain, but very often it results in losses when international prices decline. It is not a windfall profit from cheap oil bought earlier,” they said.
