As inflation bites, Pakistanis turn to cheaper Iranian fuel

• Local refineries likely to post dismal sales in 2nd quarter: analysts.
• Private dealers selling Iranian oil for as low as Rs230 per litre, they say.
• They say authorities are turning a blind eye amid declining reserves.

As inflation reached record levels over the last few months, Pakistanis fed up with near-constant increases in fuel rates turned to Iran for cheaper fuel.

Refinery sources and industry analysts told S&P Global Commodity Insights that the popularity of Iranian oil had hurt volumes at local refineries, which were likely to post dismal sales in the second quarter of 2023.

Local refineries were already facing a reduction in demand as firms across several sectors shut down due to a slowing economy, and people turned to public transport because of increasing costs. 

According to the Oil Companies Advisory Council, the country's oil sales dropped 46% year-on-year in April — a decline of about 8.8 million barrels. In the same month, fuel consumption plunged 83% to just 70,000 metric tons.

The S&P report stated that soaring inflation, a weakening rupee and a shortage of foreign exchange reserves have prompted small traders and individuals with a business network in Iran to purchase Iranian oil at heavily discounted rates, several industry analysts, including Arif Habib Ltd's Head of Research Tahir Abbas, said.

Insight Securities said that a significant price difference between Pakistani and Iranian barrels, coupled with the latter's widespread availability in the country's southern areas, was harming refiners' sales.

The average retail price of diesel has been Rs288 per litre in Pakistan in recent months, the report said. Compared to this, Iranian diesel has been selling as low as Rs230 per litre, leading to decent profits for private dealers.

"Between 35,000-60,000 barrels per day of diesel could have flowed into the domestic market through southern sea and land transportation routes under the radar in recent months and it's possible that the volumes could rise," a senior executive at Attock Refinery and a middle distillate distribution management source at Pak Arab Refinery, or PARCO, told S&P.

Import of Iranian oil has been banned in Pakistan since the United States imposed sanctions on the neighbouring country's petroleum and petrochemical trade in 2013.

Refinery sources and analysts at Insight Securities said authorities were turning a blind eye to the imports amid declining foreign reserves.

"Infiltration of Iranian diesel is growing and it could substitute as much as 25%-30% of Pakistan's total diesel sales," a private dealer said.

Besides denting local refiners' sales, the import of Iranian oil has also caused billions of dollars in losses for the government, which relies heavily on the GST and petroleum development levy from fuel sales to generate revenue.

Many private dealers with no fear of reprisal have been offering smuggled Iranian products to oil marketing companies on discounted rates minus a petroleum development levy, the report added.

"The government either doesn't understand the gravity of the situation or is just turning a blind eye due to shortage of foreign exchange reserves required for legal imports of deficit products," the Attock Refinery executive said.

He said the smuggling of Iranian oil had "never been on this huge and unparalleled scale" and if it continued, then local refineries were at risk of shutting down.