Oil sector warns diesel price cut may trigger Rs100 billion inventory loss

ISLAMABAD: Pakistan’s oil industry has warned that the recent reduction in diesel prices could leave the sector facing inventory losses of more than Rs100 billion, raising concerns about the resilience of the country’s fuel supply chain.

According to industry officials, the drop in diesel prices from Rs520 to Rs385 per litre late on Friday has provided relief to consumers, including farmers, transporters and households already under pressure from inflation. However, they said the sharp decline has created serious financial stress for oil marketing companies (OMCs) and dealers holding higher-cost stocks.

An industry official said, "The diesel price cut forces them to sell the fuel at a loss of up to Rs135 per litre. The estimated impact – over Rs100 billion in inventory losses – is not just a corporate setback; it is a systemic shock," adding that the reduction had brought relief but also exposed hidden costs within Pakistan’s fuel supply system.

Industry officials said the issue was not whether prices should come down, but whether the existing system was capable of absorbing such abrupt changes without endangering energy security. They noted that within just eight days, the oil sector had seen an unprecedented rise followed by a steep reversal.

OMCs, which are tasked with importing and distributing fuel while maintaining stocks to ensure uninterrupted supply, had imported diesel when the price stood at Rs520 per litre. Those purchases, officials said, were financed through bank borrowing. They argued that there is no mechanism in place to cushion such losses. According to them, when prices increase, gains come under scrutiny, but when prices fall, the losses are absorbed by the industry itself, reflecting what they described as a wider policy gap.

They said much of the trade operates through post-dated cheques. Dealers receive fuel on credit and commit to future payments, while OMCs rely on those payments to repay banks and finance further imports. With diesel bought at Rs520 now being sold at Rs385, officials said the value reflected in those cheques no longer matches market conditions, and defaults and payment delays have already started to appear.

Industry representatives said this kind of pressure weakens the system gradually by undermining confidence. Once trust erodes, they said, liquidity comes under strain, and supply chains can then begin to feel the impact.

Pricing mechanism under scrutiny

The industry also raised concerns about the way fuel prices are calculated in Pakistan. Officials said the pricing mechanism is based on selecting the lowest international benchmark during a given period, while OMCs in practice procure fuel at prevailing average prices shaped by contracts and logistics. They said this creates a recurring gap between assumed and actual costs, with losses becoming larger during periods of volatility.

They further said the fixed premium allowed for imports no longer reflects market conditions. At a time when global premiums had climbed to around $30 per barrel, the formula continued to recognise just over $5, according to the officials. They described this mismatch as more than a technical issue, saying it showed that the framework had failed to keep pace with developments in global markets.

Industry officials also pointed to parallels with the power sector, where they said relatively small gaps between cost and recovery eventually developed into the circular debt crisis. They said similar warning signs were now visible in the oil sector, including unrecognised costs, absorbed losses and risks building up within the system.

They warned that any disruption in fuel supply would have immediate and visible consequences, affecting transport, food prices and industry.

Officials said that without reforms, the immediate relief from lower diesel prices could eventually give way to a broader crisis for the sector.