Founder and Chairman | Trade Facilitation Network (TFN)

🔷 Abstract
Pakistan’s fuel pricing mechanism is currently based on Import Parity Pricing (IPP), a system that fully transmits international oil price volatility to domestic consumers. Despite having domestic crude production (~15%) and local refining capacity, the pricing structure does not reflect internal cost advantages.
This paper presents a comparative analysis of Pakistan, India, and China, and proposes a hybrid pricing framework combining cost-based, trade parity, and state-buffer mechanisms.
👉 The model demonstrates a realistic reduction potential of Rs. 30–70 per litre, while maintaining fiscal balance and sector viability.

1. Introduction
   Fuel pricing is not merely a technical calculation; it is a strategic economic lever affecting:

• Inflation
• Logistics and transport costs
• Industrial competitiveness
• Fiscal stability
  Pakistan’s current system prioritizes revenue certainty and international alignment, but at the cost of consumer burden and economic efficiency.

1. Pakistan’s Existing Pricing Framework
   2.1 Import Parity Pricing (IPP)
   Pakistan prices petrol (MS) and diesel (HSD) using international benchmarks:
   🔹 Petrol (MS)
   ERP₍MS₎ = Arab Gulf Gasoline Price

• Freight + Insurance + Port Costs
  × Exchange Rate

🔹 Diesel (HSD)
ERP₍HSD₎ = Arab Gulf Gasoil Price

• Freight + Insurance + Port Costs
  × Exchange Rate
  2.2 Retail Price Construction
  Petrol:
  Retail Price = ERP₍MS₎
• IFEM
• OMC Margin
• Dealer Commission
• Petroleum Levy
  Diesel:
  Retail Price = ERP₍HSD₎
• IFEM
• OMC Margin
• Dealer Commission
• Carbon Levy
  2.3 Key Characteristics
• Uniform IPP application across all supply sources
• No cost differentiation for domestic production
• Heavy reliance on Petroleum Levy (Rs. 100+ per litre)

1. Structural Limitations
   3.1 Disconnect from Domestic Resources

• Local crude (~15%) priced at international parity
• Refining cost (Rs. 5–10/L) not reflected in pricing
  3.2 Product-Based Pricing Distortion
• Pricing based on finished product benchmarks, not crude economics
• Ignores joint production nature of refining
  3.3 Absence of Price Stabilization Mechanism
• Full exposure to:
• Global oil price shocks
• Exchange rate volatility
  3.4 Fiscal Dependence
• Petroleum Levy contributes significant federal revenue
• Limits flexibility in price reduction

1. International Models
   4.1 India — Trade Parity Pricing (TPP)
   Formula:
   Price = 80% Import Parity + 20% Export Parity
   Features:

• Reflects refining and export capability
• Provides partial buffering
• Enables tax adjustments
  4.2 China — State-Controlled Model
  Mechanism:
• Benchmark-linked pricing
• Government applies:
• Price ceilings
• Adjustment delays
• Strategic buffering
  Outcome:
• Reduced volatility
• Consumer protection
• Strategic control

1. Proposed Hybrid Model for Pakistan
   5.1 Layer 1: Domestic Cost-Based Pricing
   Apply to:

• Local crude
• Local refining
  Formula:
  Domestic ERP =
  (Local crude cost – negotiated discount)
• Refining cost (Rs. 5–10)
• GRM (Rs. 10–15)
  Impact:
• Reduction: Rs. 3–5/L
  5.2 Layer 2: Trade Parity Pricing (India Model)
  Formula:
  ERP = 70% Import Parity + 30% Export Parity
  Impact:
• Reduction: Rs. 15–30/L
  5.3 Layer 3: Strategic Price Buffer (China Model)
  Mechanisms:
• Price Stabilization Fund
• Petroleum Levy adjustment
• Controlled pass-through of global shocks
  Impact:
• Reduction: Rs. 10–20/L

1. Aggregate Impact

Component| Reduction
Domestic pricing| 3–5
Trade parity| 15–30
Buffer mechanism| 10–20
✅ Total Reduction Potential:
👉 Rs. 30–70 per litre

7. Economic Implications
   7.1 Positive Outcomes

• Lower inflation
• Reduced logistics costs
• Enhanced export competitiveness
• Industrial cost relief
  7.2 Fiscal Considerations
• Gradual adjustment of Petroleum Levy
• Compensation via:
• Increased economic activity
• Broader tax base

7. Implementation Roadmap
   Phase 1 (0–6 months)

• Introduce hybrid pricing pilot
• Partial PL adjustment
  Phase 2 (6–18 months)
• Refinery upgrade incentives
• Reduce furnace oil output
  Phase 3 (18–36 months)
• Full hybrid model adoption
• Institutionalize stabilization fund

7. Conclusion
   Pakistan’s fuel pricing system is not aligned with its domestic energy structure.
   👉 The issue is not resource scarcity
   👉 The issue is pricing design
   A hybrid pricing model, combining elements from India and China, offers:

• Immediate relief
• Long-term stability
• Policy credibility
  🧭 Final Statement
  «Pakistan produces oil, refines fuel, and yet prices energy as if it imports everything
  .»Correcting this mismatch is essential for economic sustainability and consumer fairness.