In the world of classical economics, price determination is meant to reflect the laws of supply and demand. Yet, in Pakistan’s recent economic environment, petrol prices have been decoupled from global supply and demand. In a country where the middle class is already grappling with the highest CPI (Consumer Price Index) inflation in history, the ever-increasing price of petrol is more than a logistical issue; it is a symptom of a “fiscal trap” where the government’s short-term cash flow takes precedence over the sustainability of the macroeconomy.

The Disconnect: Global Supply vs. Local Desperation

Technically, the global oil markets have exhibited some level of normalcy. Given that the global supply chains are now returning to normal and the spread of the trade of crude oil is foreseeable, the normal economic postulate would be that the retail prices would start to go down. But there is one exception: Pakistan. The main reason is the so-called “sticky price” phenomenon, which is not the market law but the fiscal postulates of the state. The price of landed petroleum is not the only variable.

A fixed petroleum levy, the exchange rate, and inland freight equalization margins have been added to that commodity before it reaches the pump. For the same reason, when the international prices go down, the state uses that “margin” to extract the difference into the exchequer rather than the wallets of the public. While it helps in meeting the primary surplus targets set by........

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