- The import parity pricing structure allows for distortions in refinery margins.
- Sudden increase in diesel crack spread generates abnormal windfall profits in refineries.
- The review of additional costs narrows the gap, but the price disparity clearly persists.
ISLAMABAD: A major anomaly in Pakistan’s oil pricing mechanism has led to a windfall for local refiners and a sustained financial burden on consumers, despite the government revising the pricing formula earlier this month.
An in-depth analysis by oil industry sources of official price data for March and April 2026 shows that a wide gap between international diesel prices and crude oil benchmarks allowed refiners to earn extraordinary margins despite the government’s formula review, raising serious questions about the effectiveness and timing of regulatory intervention.
Under Pakistan’s pricing regime, petroleum products are linked to international benchmarks through the Import Parity Pricing (IPP) mechanism. Refineries receive ex-refinery prices based on these benchmarks along with margins protected by deemed duties, while the Oil and Gas Regulatory Authority (Ogra) sets retail prices after adding taxes and distribution costs.
Sources explain that the refinery’s profits are mainly due to the “crack spread”, the difference between crude oil prices and refined product prices. While this spread usually follows a stable pattern, it widened sharply in March, creating an exceptional price distortion.
The data shows that in March 2026, Platts diesel prices averaged $193.96 per barrel versus $108.45 per barrel for Arab Light crude, a ratio of around 180%. Based on historical spreads, the diesel price should have been around $124.72 per barrel. In contrast, the surplus margin averaged $69.24 per barrel, equivalent to Rs 121.51 per liter at the ex-refinery level.
Sources insist the disparity peaked on March 30, when diesel prices rose to $250.63 per barrel compared to $113.69 per barrel for crude oil, pushing the differential to around 220%. With local diesel production recorded at 490,000 metric tons, refiners are estimated to have made around Rs 60 billion in additional profits during March alone, including approximately Rs 25 billion in the last week of the month.
Despite early warning signs, the government is said to have failed to act promptly. “The anomaly should have been fixed in early March, but instead the impact was passed on to consumers, allowing refiners to make abnormal profits,” one source said.
Following growing criticism, in April the government adopted a cost-plus-price formula for a temporary period of three months, replacing the import parity model. Under the revised system, diesel prices are calculated based on Dubai crude oil plus a fixed spread of $52.89, including premium and freight. Although the revised formula suggests a lower crack spread limit of $11.33, the regulator prefers to give the higher band to refiners, allowing them to make more money.
However, sources say, new data shows that while the review narrowed the price gap, it did not eliminate it. In April, diesel prices averaged $189.27 per barrel, compared to $115.06 per barrel for light Arabian crude, a differential of around 164%. Based on historical spreads, the indicative price of diesel stood at $132.32 per barrel, leaving a surplus margin of $56.95 per barrel, or nearly Rs 100 per liter, sources said. Under the revised formula, the diesel benchmark price averaged Rs 277.10 per litre, lower than Rs 332.16 under the previous regime, but still significantly higher than the level of Rs 232.22 per liter derived from crude oil-based benchmark prices. This implies that diesel remained overpriced by around Rs 30 per liter even after the revision, sources said.
Sources revealed that authorities were alerted to the anomaly in early April but “ignored it until the issue appeared in the media,” prompting the eventual revision of the formula. Even after the change, concerns remain. “The anomaly has not been fully corrected and refiners are still allowed additional margins,” one source said.
The financial results reinforce these concerns, the source said, adding that four listed refiners reported combined gross profits of 72.2 billion rupees for the January-March quarter, compared with 27.3 billion rupees in the previous six months. A significant portion of these gains are attributed to high diesel margins in March. The figures exclude PARCO, which is not listed on the stock exchange.
Meanwhile, market sources indicate that another increase in gasoline and diesel prices is being considered, a move that could impose an additional burden on consumers. Critics argue that the correction should have been applied retrospectively.
“The revised formula should have come into effect on March 26 and excess margins earned subsequently should have been recovered,” a source said. Instead, they say, the burden continues to fall on consumers. “Instead of recovering excess profits, the government increased prices by Rs 27,” the source added.
The developments are likely to trigger fresh scrutiny of Pakistan’s oil pricing framework, with increasingly loud calls to more closely align domestic fuel prices with crude oil benchmarks and avoid windfall profits at the public’s expense.
Originally published in The News
