Petrol Shortage Imminent? Oil Industry Sounds Warning Bells

The Oil Companies Advisory Council (OCAC) has warned of a major disruption to the already fragile supply chain in a report to the government.

The oil industry is apparently struggling to arrange crude oil and petroleum products due to foreign exchange constraints and current product pricing, especially in light of the recent currency drop and increase in the central bank’s policy rate.

In this regard, the association has sought an urgent engagement to address the “severe impact of the recent depreciation of the rupee”, reported a national daily.

The oil industry stated that PKR’s recent depreciation of roughly Rs. 20 against the US dollar had rendered the existing letter of credit (LC) lines insufficient, resulting in a grave danger that imports of crude and refined products may be disrupted. It further emphasized that it was also a source of great concern for the industry that the cost of opening confirmed LCs had increased many times, negatively impacting profitability.

The OCAC recalled that the oil industry had asked the ministries of energy and finance to create a transparent mechanism for recovering all foreign exchange losses in product pricing.

It stated that the government should immediately revise prices based on the current exchange rate, but if that was not possible in the given difficult situation, a system should be put in place right away.

At current rupee-dollar parity and following the recent increase in SBP policy rates, simply maintaining 20 days’ mandatory stock cover as required by OMCs’ license has resulted in borrowing costs of more than 50 percent of regulated margins. OCAC warned that in this extremely challenging environment, additional working capital burdens can raise significant concerns for OMCs.

Furthermore, the association stated that its members had been hit twice by the erosion of equity as a result of foreign exchange losses, as well as a reduction in working capital lines as a result of an increase in the rupee-dollar parity combined with an increase in international oil prices, particularly high-speed diesel. In recent months, the OMCs have reported about Rs. 35 billion in cumulative losses in fuel pricing.

“The industry is on the brink of collapse, instances of fuel shortages in certain areas earlier this year highlight the fragile condition of the industry” for which only the government intervention on an urgent basis would ensure uninterrupted supplies”, the industry said.

As a result, OCAC has urged the government to ensure that the banking sector increased limits for oil companies and refineries, allowing them to manage the impact of rising oil prices and rupee depreciation, which was critical to the sector’s survival.

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