Diesel price may fall by Rs20 per litre

The government is considering a major reduction in the price of high-speed diesel (HSD), with the retail rate

The government is considering a major reduction in the price of high-speed diesel (HSD), with the retail rate potentially falling by Rs18 to Rs20 per litre under a proposed new pricing mechanism.

The move follows a decision to reduce the capped HSD crack spread from $41.8 to $30 per barrel. The proposal will first be presented to Prime Minister Shehbaz Sharif for approval before being sent to the Cabinet Committee on Energy.

Under the proposed system, the HSD crack spread would be linked to the landed cost of crude oil for each refinery. Officials believe the mechanism would allow refineries to recover additional expenses such as freight, insurance, war-risk charges and crude premiums while keeping their gross refinery margins from turning negative.

The government had previously cut the diesel price by Rs32 per litre on August 19 after capping the HSD crack spread at $41.8 per barrel. At the time, the international HSD crack was around $68-70 per barrel.

The latest proposal could provide further relief to consumers at a time when diesel prices have reached Rs374.31 per litre. Officials are particularly concerned about HSD because higher diesel costs can increase transportation expenses and add pressure to inflation, which has already reached double digits.

Pakistan currently meets its entire HSD requirement through domestic production. The situation is different for petrol, with around 70-75% of the country’s petrol requirements being met through imports. As a result, the government has decided to keep the existing petrol pricing formula unchanged for now.

Officials said the new mechanism is intended to balance consumer relief with the financial needs of domestic refineries. Maintaining positive refinery margins is considered important because several refineries are seeking foreign financing for planned upgradation projects worth around $5 billion.

The proposal was finalised during a Petroleum Price Committee meeting held on September 2. The committee also reviewed a crack-based trigger mechanism proposed as part of the broader transition towards deregulation of petrol and diesel.

Under the proposed framework, HSD crack levels between $10 and $30 per barrel would serve as vigilance triggers rather than fixed price intervention points. If the seven-day average moves beyond either level, the Oil and Gas Regulatory Authority would convene a meeting with refineries to examine their margins and market conditions.

The committee also discussed changes to the Inland Freight Equalisation Margin system. A proposed shift from the existing 20+2 depot model to a 9+2 structure could improve competition and efficiency in fuel transportation, with estimated savings of Rs2.5 billion to Rs3 billion.

The impact of the freight changes on the national fuel price, however, is expected to remain limited at around 10 to 20 paisas per litre.

The committee also examined the issue of windfall gains earned by oil marketing companies. Officials differed over how such profits should be defined, particularly when companies experience gains during one period but losses during another.

The committee noted that ordinary inventory gains caused by temporary price movements generally reverse over time and should not automatically be treated as windfall profits.

A financial review also indicated that compliant oil marketing companies had not recorded abnormal profits during the last financial year. The committee therefore decided that no additional action against such companies was required at this stage.