Date: 4-4-2026
TFN RESEARCH ARTICLE |
By Muhammad Anwar CMILT | 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.
- 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.
- PakistFrameworkan’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)
- 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
- 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
- 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
- Aggregate Impact
▪ Component| Reduction
▪ Domestic pricing| 3–5
▪ Trade parity| 15–30
▪ Buffer mechanism| 10–20
√ Total Reduction Potential:
Rs. 30–70 per litre
- 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
- 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
- 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.
