OPINION
Ammar H. Khan
The paradox of gas prices
In absence of gas availability through pipelines, most domestic consumers substitute gas with LPG. As per latest prices notified by OGRA, gas available through LPG is priced at US$ 23.75 per mmbtu. This is essentially at a 91 percent premium to the price of imported gas. Gas purchased through a LPG container also has safety concerns, while requiring additional time and resources for buying more gas, or simply swapping containers. The customer is paying a significant premium to get gas, which is greater than 100 percent after adjusting for retailer margin and other costs, even though the same gas can be supplied at market price to the customfew weeks back we talked about how fixing prices lead er, and still be at a substantial discount to the price of LPG. to a market failure regardless of the commodity under Through a fixed price, or a price which is hostage to populist consideration. A peculiar case here is that of natural measures, the market has evolved in such a manner that an efficient gas. A molecule of natural gas with its energy content mode of transportation has been superseded by highly inefficient measured in mmbtu (metric million British thermal unit) LPG containers. It is understandable that LPG plays a critical role will generate the same level of energy. Essentially when in supplying gas where pipeline infrastructure isn’t available, but a consumer pays for natural gas, they are paying for that energy. In an utilization of LPG where pipeline infrastructure is available is just optimal scenario, a consumer would prefer the same content of energy at colossal inefficiency. Gas pricing in the country is probably one of lowest possible price through an efficient delivery mechanism. those rare cases where there is a welfare loss for both consumers In the real world, that efficient delivery mechanism is known as a (who have to pay a higher price for LPG), and producers (who have gas pipeline. Pakistan has one of the largest natural gas pipeline networks unutilized infrastructure). Welfare surplus is for traders and midin the world, whether that was a smart infrastructure investment or not is dlemen who are exploiting this arbitrage. As discussed above, the a separate debate, what matters is that an infrastructure already exists. molecule remains the same, how the same is transported, and how A natural gas molecule is either extracted from local gas fields, or the same is priced is what results in welfare surplus, or loss. imported in liquid form, and eventually gasified, and sent through pipeRecently, there has been a push for reform with the Federal lines. Alternatively, a molecule of gas can also be extracted from Liquified Minister for Energy calling for implementation of a Weighted AverPetroleum Gas (LPG), which is sold in specialized containers. This is age Cost of Gas – although a fairly simple mathematical calculation, pretty straightforward until now. The paradox is in how natural gas is the political calculus is convoluted. Resolution of the gas crisis and priced. On a per mmbtu basis (the most basic unit of energy), gas that is reversion to consumer surplus would require a national consensus supplied to most domestic customers is in the range of US$ 2 to US$ 5, across the board. Before that can happen, it remains essential the but if the same gas is imported, the blended cost is US$ 12.37 per mmbtu importance of market price, and how the transmission mechanism as per latest notified RLNG price by OGRA. actually generates consumer surplus is effectively communicated. If we look at prices on a marginal cost basis, importing gas and supEasier said than done, but a complete revamp of gas distribution plying the same to domestic consumers is a loss making proposition. Each companies has been long overdue. molecule of gas supplied would result in a loss. Furthermore, as price is The Sui twins operate with precarious financials and substanfixed at an unreasonably low level, the demand is much greater than the tial unaccounted for gas losses – which are high enough to become supply resulting in a shortage, which is further aggravated during winter the largest consumption category on its own. As imported gas as demand for heating increases. passes through the pipeline, it is important that wastage is minimal, as any wastage or loss is effectively borne by the consumer through either a higher price, or a shortage. Policy makers need to decide whether they want a sustainable consumer surplus, or they want a myopic solution where the optics of fixing prices results in a shortage.Transitioning towards a market-oriented pricing mechanism requires tough political The writer is an decisions, and one hopes that the incumbent can push the process of reforms forward. In absence of any reforms independent or due to delays, the situation will continue to deteriorate, billions of dollars invested in pipeline infrastructure macroeconomist and would remain unutilized and become stranded assets. Consumers will increasingly shift towards utilizing LPG energy analyst. in absence of any other viable option, while gas distribution companies would collapse under their own weight, or become yet another white elephant for an already overburdened national exchequer. It is time that we let the market find its equilibrium price, and let the policies be tilted towards sustainable consumer surplus, rather than be driven by rose-tinted optics of a fixed price.
How fixing prices destroys consumer welfare
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