- Proposal to be presented to PM Shehbaz for approval.
- Petrol margin currently stands at $0-2 per barrel.
- Petrol pricing formula to remain unchanged for now.
ISLAMABAD: Diesel price could fall by around Rs18 to Rs20 per litre after the government decided to further reduce the high-speed diesel (HSD) crack spread to $30 per barrel.
“Under the proposed mechanism, the HSD crack spread will be linked to the landed cost of crude oil for each individual refinery. The mechanism will remain in place until the crisis surrounding the Strait of Hormuz eases,” The News reported on Saturday, citing a senior top official at the petroleum ministry.
Earlier, on August 19, the government reduced the price of diesel by Rs32 per litre in one go by capping the HSD crack spread at $41.8 per barrel, compared with an international market crack of around $68-70 per barrel.
In April, the government had also reduced the refinery crack to $41.5 per barrel, resulting in an estimated Rs24 billion loss in refinery profits.
The government has now decided to reduce the capped HSD crack spread further, from $41.8 to $30 per barrel, which is expected to translate into a reduction of Rs18-20 per litre in the retail price of diesel.
However, the new mechanism is designed to ensure that the gross refinery margin (GRM) of individual refineries does not fall into negative territory and that their financial statements remain on a positive trajectory.
This is considered important for refineries seeking financing from foreign lenders for approximately $5 billion in planned upgradation projects.
The negative margin on furnace oil, however, remains a challenge and continues to affect the overall GRM of refineries.
At present, the HSD crack spread is capped at $41.8 per barrel, against an international market spread of around $100 per barrel. Pakistan is currently producing 100% of its HSD requirements domestically.
Different situation for petrol
The situation is different for petrol. The petrol margin currently stands at around $0-2 per barrel, while approximately 70% to 75% of petrol is imported. Therefore, the existing petrol pricing formula will remain unchanged for now.
The government’s primary concern is the rising price of HSD, which has significant implications for inflation. Inflation has already entered double digits at 11.1%, with consumers across the country increasingly feeling the impact. The price of diesel has reached Rs374.31 per litre, an exceptionally high level.
Although lowering the HSD crack spread from $41.8 to $30 per barrel could reduce refinery profitability, officials say linking the $30 crack with the landed cost of crude will ensure that additional costs — including freight, insurance, war-risk charges and crude premiums — are recovered.
An official explained that HSD crack spreads had surged during exceptional periods such as the Ukraine war, the Covid-19 crisis and the current Iran-related conflict.
During more normal periods, international HSD cracks have generally remained around $30-35 per barrel, allowing refineries and oil marketing companies to remain profitable.
The proposal was finalised during the seventh meeting of the Petroleum Price Committee held on September 2, 2026. It will now be presented to Prime Minister Shehbaz Sharif for approval. If approved, it will subsequently be submitted to the Cabinet Committee on Energy (CCOE) for formal approval.
The official gave the example of a refinery importing Murban crude at around $90 per barrel. By the time the crude reaches Pakistan, its landed cost may rise to more than $101 per barrel because of premiums, insurance, war-risk charges and higher freight costs.
Similarly, for instance, crude imported by Cnergyico PK Limited (CPL) from the United States would also carry a higher landed cost. Under the proposed mechanism, the $30-per-barrel HSD crack would, therefore, be calculated with reference to the landed crude cost applicable to each refinery.
The committee also reviewed the KPMG-proposed crack-based trigger mechanism as part of the broader transition towards deregulation of MS (petrol) and HSD. It reaffirmed import parity and daily pricing as the underlying principles.
For HSD, the proposed $10-30 per barrel crack collar was discussed. The committee agreed that these levels would serve as vigilance triggers rather than rigid floors, ceilings or automatic price-intervention points.
It was emphasised that any assessment of crack-spread movements should take into account the overall economics of refineries, including GRMs, crude premiums and freight costs.
During the sixth meeting, industry stakeholders had broadly agreed that a breach of the $30-per-barrel level should trigger enhanced vigilance. If the seven-day rolling average of the crack breaches either the $10 floor or $30 ceiling, Ogra would immediately convene a meeting with all refineries operating in Pakistan to review their GRMs and the broader market situation.
The seventh meeting also decided that petrol would be deregulated by June next year.
Regarding the Inland Freight Equalisation Margin (IFEM) as part of the deregulation process, the committee discussed replacing the existing 20+2 depot-primary-location model with an alternative “9+2” model.
Under the proposed arrangement, pipeline-connected and strategically important locations would remain within the primary network, while other movements would shift to secondary freight. The objective is to promote greater competition and efficiency among market players.
The committee estimated that the rationalisation could generate savings of approximately Rs2.5-3 billion. Its impact on the nationally announced fuel price was estimated at only around Rs0.10-0.20 per litre.
Discussion on windfall gains
The committee also considered the treatment of windfall gains.
An official told The News that his position during the meeting was that windfall profit should refer to gains achieved without a corresponding increase in input costs. However, officials from the Federal Board of Revenue (FBR) disagreed with this interpretation.
The matter will now be discussed between representatives of the Petroleum Division and Finance Division.
The official argued that if profits increase sharply in one month but the company subsequently incurs losses in another month, such cyclical gains should not automatically be classified as windfall profits.
The committee noted that normal inventory gains and losses arising from cyclical price movements generally reverse over time and should therefore be distinguished from extraordinary, non-reversing gains that could constitute genuine windfall profits.
Based on the financial analysis presented, the subcommittee assessed that compliant oil marketing companies, including Pakistan State Oil (PSO), had not earned abnormal profits during FY26. It also noted that their already high effective tax burden substantially captures any gains through the normal taxation framework.
Accordingly, the committee agreed that no additional intervention was warranted against compliant OMCs at this stage. The issue of stock audits has already been referred to Ogra on the prime minister’s direction.
