Petroleum Pricing Gap Raises Refinery Profits, Consumer Costs

A pricing distortion within Pakistan’s petroleum pricing framework has led to substantial windfall gains for domestic refineries, while transferring elevated costs to end-consumers, despite a recent adjustment in the pricing mechanism, according to a report by The News citing industry sources.

A review of official data for March and April 2026 reveals a pronounced divergence between international diesel prices and crude oil benchmarks, which significantly expanded refinery margins under the Import Parity Pricing (IPP) regime, raising questions regarding regulatory oversight and effectiveness.

Under the prevailing system, domestic petroleum product prices are benchmarked against international markets, with refineries receiving ex-refinery rates aligned with these benchmarks, while the Oil and Gas Regulatory Authority (Ogra) determines final retail prices after incorporating taxes and distribution margins.

The distortion was primarily driven by a surge in the crack spread — the differential between crude oil and refined product prices. In March 2026, diesel averaged $193.96 per barrel compared to $108.45 per barrel for Arab Light crude, reflecting a ratio of approximately 180%. Based on historical norms, diesel prices would have been closer to $124.72 per barrel, resulting in an excess margin of $69.24 per barrel, equivalent to Rs121.51 per litre at the ex-refinery level.

The disparity intensified on March 30, when diesel prices reached $250.63 per barrel against $113.69 per barrel for crude, pushing the spread to nearly 220%. With domestic diesel output at approximately 490,000 metric tonnes, refineries are estimated to have generated around Rs60 billion in additional profits during March alone, including roughly Rs25 billion in the final week.

Sources indicate that regulatory authorities did not intervene at the initial stage of the anomaly, allowing the increased costs to be passed through to consumers. Subsequently, the government introduced a temporary cost-plus pricing model in April for a three-month period, replacing the IPP framework.

Under the revised structure, diesel pricing is linked to Dubai crude with a fixed crack spread of $52.89, inclusive of premiums and freight. However, available data suggests that pricing inefficiencies persist. In April, diesel averaged $189.27 per barrel compared to $115.06 per barrel for crude, reflecting a differential of approximately 164%.

Applying historical benchmarks, diesel prices would have been around $132.32 per barrel, implying an excess margin of $56.95 per barrel, or nearly Rs100 per litre. While the revised formula resulted in an average price of Rs277.10 per litre, compared to Rs332.16 under the previous system, it remained higher than the estimated Rs232.22 per litre based on crude benchmarks, indicating an overpricing of roughly Rs30 per litre.

Financial disclosures show that four listed refineries collectively reported gross profits of Rs72.2 billion during the January–March quarter, compared to Rs27.3 billion in the preceding six months, with elevated diesel margins being a key contributor.

Sources further noted that authorities were alerted to the issue in early April but took action only after it gained broader attention. Concerns remain that excess margins may still be embedded within the revised framework.

Market participants have indicated that further upward revisions in petrol and diesel prices are under consideration, potentially increasing the burden on consumers. Critics argue that the revised pricing mechanism should have been implemented earlier and excess gains recovered, but the financial impact has largely been borne by end-users.