Fund launched to shield against oil price volatility

ISLAMABAD: The federal government has notified a new head of account for the creation of a petroleum price stabilisation fund, implementing a decision taken by the federal cabinet on June 5 to set up a mechanism aimed at softening the impact of fuel price volatility.

According to a notification issued by the Ministry of Finance on Monday, receipts collected in the name of the Petroleum Prices Stabilisation Fund will be placed in the Public Account of the Federation under the major head of Special Deposit Fund.

The notification said the finance division, petroleum division and the Oil and Gas Regulatory Authority would work out the fund’s modalities and operating procedures in line with legal and financial requirements. The required approvals would be obtained separately.

The move comes after sharp increases in oil prices in recent months linked to the US-Israel war on Iran. In some earlier instances, the government had secured a few oil cargoes directly through diplomatic channels, resulting in notable savings compared with regular industry procurement methods. However, those arrangements were handled on an ad hoc basis through administrative authority rather than under a formal legal structure.

Fund currently has no deposits

Informed sources said the newly created fund does not yet contain any deposits, but the framework has been put in place to enable the government to use future opportunities that may arise unexpectedly. They said money accumulated over the past few months, as well as funds generated through future austerity steps, could be transferred into the fund.

Those resources, the sources said, would be used in weekly petroleum price adjustments to reduce sudden price shocks for consumers. They added that the government could also explore new funding streams in the next fiscal year, although its room for financial manoeuvring remains constrained under the IMF programme.

Even so, a limited amount from special provincial grants to the federal government could still be earmarked for petroleum, oil and lubricants price stability.

Scope of the mechanism

Sources said the fund could also help capture gains in cases where oil imports from non-traditional suppliers such as the United States, Russia and Iran, or the use of specialised warehouse storage, provide prices lower than those available through standard imports from the Middle East.

Under that arrangement, such windfalls could be diverted fully or partly towards stabilising domestic fuel prices instead of leaving the entire benefit with importing companies and refineries.

The official notification included the statement: "All proceeds received in the name of the Petro­leum Prices Stabilisation Fund will be credited to the Public Account of the Federation under the major head ‘Special Deposit Fund’"