The recent surge in petrol and diesel prices in Pakistan has triggered a widespread debate over whether the government and oil companies are earning billions of rupees through so-called “inventory profits” by selling previously imported cheaper fuel at higher retail prices.
The discussion has gained momentum on social media and within some economic circles, where critics argue that oil purchased weeks earlier at lower global prices should generate massive profits when sold after domestic price hikes.
However, energy sector experts say the argument is largely based on a misunderstanding of how Pakistan’s petroleum pricing system and supply chain operate.
Unlike common perception, domestic petrol and diesel prices are not determined based on the cost of individual cargoes or the price at which a particular shipment was purchased. Instead, the government calculates fuel prices using the average international benchmark prices published by S&P Global Commodity Insights (Platts) during the designated pricing period.
These benchmark prices reflect prevailing global market values. The government then incorporates other factors including the exchange rate, freight costs, taxes, petroleum levy, and marketing margins before determining the final retail price.
For instance, the fuel prices announced earlier this month were based on the international market trend prevailing during the pricing window. At that time, the global price of diesel averaged around $88 per barrel, while petrol hovered near $78 per barrel.
However, the global energy market witnessed sharp volatility shortly afterwards due to escalating geopolitical tensions in the Middle East. Within days, international diesel prices surged above $149 per barrel while petrol climbed to around $106 per barrel.
Another key element often ignored in the public debate is the logistical time lag in oil procurement and transportation.
Petroleum cargoes take weeks to reach Pakistan. For example, shipments from the Saudi port of Yanbu generally require about 20 days to arrive. This means fuel purchased today will reach local ports weeks later and its cost reflects the global market price at the time of procurement.
If the government were to keep domestic fuel prices artificially low by relying solely on older and cheaper inventory, it could create serious distortions in the supply chain. Oil refineries and marketing companies might become reluctant to import expensive fuel because regulated retail prices would not allow them to recover their costs.
Such a scenario could disrupt fuel supplies and aggravate the energy sector’s persistent circular debt problem.
Another important aspect is the regulatory requirement that oil companies maintain mandatory stocks equivalent to roughly 20 days of national consumption to ensure uninterrupted fuel availability across the country. In periods of geopolitical uncertainty, companies may hold even higher inventories as a precaution.
This requirement means oil companies operate in a continuous replenishment cycle. While fuel from existing stocks is being sold to consumers, companies simultaneously purchase new cargoes from international markets to replenish the inventory.
As a result, every litre sold today must eventually be replaced by another litre purchased at current global prices in order to maintain mandatory stock levels. This replacement cost significantly offsets any perceived inventory gain.
Industry analysts note that the opposite situation occurs frequently when global oil prices decline.
When international prices fall, the government reduces domestic fuel prices accordingly. However, refineries and oil marketing companies may still be holding stocks purchased earlier at higher prices. In such cases, they are forced to sell the fuel at lower regulated rates, resulting in substantial inventory losses.
A similar situation occurred in December when petrol prices were reduced by about Rs24 per litre following a drop in global oil markets. At that time, companies were holding inventories acquired at higher prices and had to absorb significant financial losses.
According to Petroleum Minister Ali Pervaiz Malik, the global energy market remains highly uncertain due to geopolitical tensions in the Middle East, which have triggered sharp fluctuations in international oil prices.
Under these circumstances, aligning domestic fuel prices with global market trends is essential to ensure uninterrupted supply and prevent artificial shortages or market distortions.
Government officials maintain that suppressing domestic prices artificially could discourage imports, strain the petroleum supply chain, and deepen financial challenges within the energy sector.
Experts therefore argue that the debate over so-called “inventory profits” should be viewed within the broader realities of global energy markets, where price volatility can produce both temporary gains and significant losses for oil companies.
