Furnace oil price & its impact

THE already expensive electricity will become costlier. During the past few weeks the PSO has gradually increased the price of furnace oil, the primary fuel used in power generation, by another Rs6,000 per tonne.

 The price of furnace oil is deregulated. Oil marketing companies and the PSO, with virtual monopoly over furnace oil imports, fix the price.

The price of imported furnace oil now stands at Rs53,000 per tonne ex-PSO depot. This level of furnace oil price was last seen in 2008 when crude oil price peaked at $147 a barrel.

Considering the present crude oil price of $85 a barrel, one fails to understand the rationale behind the current price of Rs53,000 a tonne even after taking into account depreciation of the Pakistani currency against the dollar by about 35 to 40 per cent since 2008.

This is the time in winter when power generation from thermal plants across the country using furnace oil is at the maximum level, mainly due to curtailment of natural gas supply and decrease in hydroelectric power generation.

As the availability of water for power generation decreases in winter months, the maximum hydroelectric generation capacity of 6,000 MW in the country dips to less than 20 per cent.

Moreover, with the demand for natural gas outpacing the available supply, gas utilities are forced to curtail or discontinue supply of natural gas to power plants from December to February and instead divert it for domestic heating and other priority sectors.

As the inexpensive mode of power generation through hydro and natural gas are down to a minimum level, the only option left for dependable power generation during winter months is through furnace oil.

In view of the present price of Rs53,000 a tonne and considering the efficiency of thermal power plants in our country, only four or five units of electricity can be produced with one kilogram of oil.

In simple term, all other cost components of power generation, transmission and distribution set aside, just the cost of fuel oil for producing one unit of electricity (kWh) will be about Rs12.

Judging from the fact that 35 per cent of all the electricity produced is from furnace oil, the impact of price increase on the entire economy is widespread as under Nepra`s tariff approval mechanism, the fuel price change is directly passed on to consumers.

The increase will further inflate the amount of inter-corporate or circular debt. The question is, can we sustain this level of power tariff driven by inflated fuel oil prices?

Does it make business sense to provide windfall profits to a few oil sector companies at the expense of entire economy? The long-term solutions using cheaper options for power generation with a view to bringing down the overall tariff are many.

However, for immediate term, a thorough review of entire procurement procedure of imported furnace oil and its price fixation may bring down the oil prices, thus providing the much needed relief to electricity consumers.