The government has once again enforced the formula adopted in April to contain high-speed diesel (HSD) prices, capping the diesel crack spread at $41.5 per barrel against the international level of margin around $68 per barrel, enabling a reduction of approximately Rs. 32.63 per litre to Rs. 363.69 per litre in the domestic diesel price. However, the government increased the petrol price by Rs. 2.97 per litre to Rs. 337.51 per litre.
The move to massively scale down high-speed diesel marks the second time since the outbreak of the Iran war that domestic refineries have agreed to sacrifice part of their profits to help the government provide relief to consumers amid a sharp increase in international oil prices.
“The latest arrangement was finalized after virtual meetings between the petroleum minister, secretary and top managements of four Karachi-based refineries, held on the directions of the prime minister.”
The government argued that around 70 percent of HSD is produced domestically by four refineries that import crude oil, and therefore their cooperation was essential in reducing the impact of international diesel prices on consumers.
Pricing Mechanism
Under the normal pricing mechanism, the international diesel crack spread of around $68 per barrel would have placed significant upward pressure on the domestic HSD price. However, the government and refineries agreed to cap the crack spread at $41.5 per barrel, thereby excluding a substantial portion of the international increase from the domestic pricing formula.
The arrangement has helped the government reduce the HSD price by around Rs. 32.63 per litre in one go. The refineries, however, have sought recovery of per barrel premium on imported crude, arguing that this cost must be incorporated into the pricing mechanism to prevent them from suffering losses.
During the negotiations, the government considered two options to reduce the impact of high international diesel prices. The first was to cap the HSD crack spread at $41.5 per barrel, while the second was to reduce the gross refinery margin (GRM). The refineries opposed any reduction in the GRM, arguing that their existing margin is already limited.
Duration and Impact
The cap on the HSD crack spread will remain in place until the situation in the Strait of Hormuz improves and international oil markets return to normal, according to the understanding reached with the refineries. The refineries also insisted that the capped crack spread should be determined on the basis of imported crude oil and its premium.
While the decision provides immediate relief to consumers, it could create substantial losses for oil marketing companies (OMCs) and dealers that had already procured HSD stocks at higher prices. These companies may now be forced to sell their existing inventories at the lower revised price, effectively bearing the cost of the sudden price adjustment.
