Pakistan's Oil Supply Chain Amid Regional Conflict: Observations and the Path Forward

April 6, 2026 (MLN): On 28 February 2026, joint US-Israeli strikes on Iran effectively closed the Strait of Hormuz, through which Pakistan sources roughly 80 percent of its energy imports.

The consequences were immediate and severe. Between 27 February and 2 April, Dubai Crude rose 61 percent from $71.23 to $114.60 per barrel. But crude was the least of it.

Diesel, the fuel that moves Pakistan's economy, rose 222 percent, from $88.46 to $284.97 per barrel. Gasoline rose 79.5 percent, jet fuel 150.8 percent. These are base Platts prices before freight, insurance, and trader premiums are added on top.

Source: Platts Arabian Gulf benchmarks. Base prices excluding premiums, freight, insurance, taxes, and duties.

The reason products moved so much more than crude is important to understand. The crisis destroyed refining capacity, not just shipping routes.

The diesel crack spread, normally around $10 per barrel, blew out to $170 per barrel, fifteen times its historical level. Crude has buffers: strategic reserves, spare capacity, pipeline rerouting. Refined products have none. Ship insurance costs in the Gulf rose sixfold.

Diesel import premiums surged from $5 to $23 per barrel. Every one of these costs landed in the price of fuel at the pump.

The government responded with commendable urgency. Pre-emptive stock-building in January and February created a 28-day buffer, naval protection was extended to fuel vessels, Oman was brought in as an alternative supplier, and Iran was negotiated with to permit 20 oil cargoes through the Strait. That supply continuity was maintained throughout is a genuine achievement.

The Pricing Misstep and Its Cost

The government's handling of domestic prices is a more difficult story. Between 14 and 28 March, the Prime Minister rejected three successive proposals to raise prices.

By the third rejection, diesel's ex-refinery price had reached Rs 432 per litre while the pump price sat frozen at Rs 336. The government was selling every litre at a structural loss, absorbing Rs 56 billion per week, with cumulative absorption reaching Rs 129 billion. The entire financing burden fell on OMCs through the PDC mechanism.

On 3 April, the government executed the largest single-day fuel price adjustment in Pakistan's history. Petrol rose 43 percent to Rs 458, diesel rose 55 percent to Rs 520.

Transport fares rose 25 to 30 percent overnight. Food prices rose 20 to 40 percent within 24 hours. The fiscal burden shifted to provinces, pooling Rs 200 billion over three months, with targeted subsidies for bikers, farmers, and transport operators. The IMF had made clear that further blanket subsidies were incompatible with programme commitments.

Three weeks of price-holding did not protect consumers. It delayed and concentrated the pain into a single explosive adjustment while generating a Rs 129 billion fiscal hole.

A pricing mechanism that moves continuously with the market, supported by direct fiscal transfers to vulnerable segments, would have distributed this adjustment gradually and at far lower total cost. The events of March and April 2026 make that case more powerfully than any policy paper.

The Burden Carried by OMCs

OMCs are the operational backbone of Pakistan's fuel supply. They procure, import, store, and distribute fuel to 12,000 petrol stations nationwide. Through this crisis, they have been asked to carry a burden that would strain any commercial enterprise.

By the close of the third week of the PDC cycle, OMCs had accumulated unreimbursed subsidy obligations of Rs 203.88 per litre on diesel and Rs 95.59 per litre on petrol, financed entirely from their own working capital. The Rs 203.88 on diesel alone represents nearly 40 percent of the post-hike pump price of Rs 520.

Three weeks of scheduled weekly payments fell into arrears, leaving total outstanding PDC of up to Rs 40 billion. Banks, seeing PDC receivables piling up on balance sheets without resolution, tightened credit limits further.

Simultaneously, the mandatory requirement to hold 20 days of petroleum stock, sensible under normal conditions, became extraordinarily expensive.

The capital needed to fund 20 days of diesel at $284 per barrel is more than three times what was needed at $88. Insurance costs rose sixfold. Freight rates increased. Risk premiums were embedded in every new cargo. None of this was reflected in any adjustment to the stock mandate or any financing support.

OMC margins, meanwhile, have not been revised since September 2023. Throughout the crisis, as diesel moved from $88 to $284 per barrel, margins remained fixed at Rs 7.87 per litre. A margin calibrated at one cost level cannot remain meaningful when costs triple. The solution is straightforward: link margins to a percentage of the total cost of the molecule, so they adjust automatically as procurement costs change.

There is also the matter of deadstock, the inventory required to keep government-owned pipelines operational, financed entirely by OMCs, earning no return. As product prices tripled, the rupee cost of financing that deadstock tripled too. And Rs 73 billion in GST refunds has sat unresolved with the FBR since 2022.

Add it together: Rs 40 billion in PDC arrears, Rs 203.88 per litre on diesel carried as unreimbursed subsidy, frozen margins since September 2023, tripled inventory costs, sixfold insurance increases, unchanged stock mandates, growing deadstock obligations, and Rs 73 billion in unresolved GST refunds.

The industry communicated all of this formally and patiently to the Prime Minister, to OGRA, and to the Ministry. That communication deserves an equally serious response.

Regulatory Friction at the Wrong Moment

During the height of the crisis, several new compliance requirements were introduced. OGRA proposed withholding 10 percent of PDC disbursements pending FBR cross-verification, a Rs 7.4 billion additional burden on an industry already carrying Rs 203.88 per litre in unreimbursed PDC.

A directive required invoice-level documentation for PDC claims that audit firms are not equipped to verify at the scale and speed required. All OMC and refinery stocks were to be audited monthly by a single designated firm, operationally difficult given Pakistan's geographically dispersed storage network.

The industry's sensible proposal to expand this to the top ten ICAP/QCR A-Category firms deserves acceptance. OMCs were directed to procure 24,000 mobile devices at Rs 36,000 each at their own cost to run the digital subsidy app, despite most retail outlets already owning capable smartphones and despite the directive specifying a single vendor.

And OGRA proposed replacing the existing pricing formula with an untested four-week Platts average mechanism, which the industry unanimously rejected, noting that the existing formula had performed well through the 2022 Russia-Ukraine crisis and that introducing untested methodology mid-crisis, with active LCs at stake, was simply too risky.

Each directive may be individually defensible. Together, they placed significant additional burden on an industry being relied upon to keep fuel flowing, without adequate regard for cumulative impact.

The Imbalance Worth Noting

One observation deserves to be made clearly, if diplomatically. While OMCs were squeezed from every direction, Pakistan's domestic refineries, which buy crude and sell refined products at global benchmark prices, benefited mechanically from the same crack spread that devastated everyone else.

Crude rose 61 percent; diesel rose 222 percent. The gap between refinery input cost and output price expanded dramatically. Gross refining margins are currently at likely the strongest levels in Pakistan's refining history, well above the previous peak of $27 per barrel during the 2022 Ukraine crisis.

This is not a criticism, as refineries operate within their own framework. But it does make the case for the long-pending brownfield refinery expansion policy more compellingly than ever, and it raises a fair question about whether the distribution of burden across the supply chain reflects considered policy or simply the path of least resistance.

What Needs to Happen

The reforms required are not novel. They have been discussed for years. The crisis has simply made the cost of not acting impossible to ignore.

Deregulate headline fuel prices and protect vulnerable consumers through direct fiscal transfers. The targeted subsidy architecture, comprising Kisan cards, Hari cards, BISP, and the digital app, now exists in embryonic form. Use it. Expedite PDC reimbursements on a reliable weekly cycle and reconsider the 10 percent withholding.

Settle the Rs 73 billion GST backlog on a time-bound basis. Revise OMC margins and move to a percentage-of-cost structure that adjusts automatically with the cost of the molecule. Introduce a financing mechanism or dynamic adjustment for the 20-day stock mandate under crisis-price conditions.

Establish a formal cost-recovery mechanism for pipeline deadstock. Finalise the brownfield refinery policy and the customs-bonded storage policy, both long overdue and both with a stronger commercial case today than at any point in the past. Build formal strategic petroleum reserves as national policy, not opportunistic pre-positioning. Develop a hedging and derivatives framework so the sector has tools to manage price volatility rather than simply absorbing it raw.

On governance, the approach needs to change fundamentally. OGRA must be strengthened as the single, authoritative regulatory voice for the sector, not weakened through fragmented, multi-agency interventions during a crisis.

The deployment of investigative and enforcement agencies into routine commercial matters shakes investor confidence, encourages risk-averse and at times unethical behaviour, and sends precisely the wrong signal to the serious capital the sector needs to attract.

Regulation should work through OGRA, consistently and transparently, rewarding companies that perform well, meet their obligations, and invest in infrastructure, while discouraging those that do not, through the normal course of regulatory oversight rather than ad hoc enforcement actions.

Finally, and perhaps most structurally, Pakistan's OMC sector needs meaningful consolidation. With over 40 licensed OMCs currently operating, the market is fragmented well beyond what is commercially rational or operationally sustainable. Many of these entities lack the capitalisation, infrastructure, and governance standards that a strategically critical sector demands.

A serious consolidation programme, reducing the number of active OMCs to a manageable cohort of professional, well-capitalised, and properly governed companies, would improve financial resilience across the sector, raise the quality of service and compliance, reduce the regulatory burden of supervising dozens of undercapitalised players, and send a clear signal that Pakistan's downstream petroleum market is open to serious investors, not simply to licence-holders.

The current crisis has demonstrated what happens when the sector's weakest links are placed under pressure. Consolidation is the structural answer.

In Closing

Pakistan's fuel supply chain survived a shock that had no precedent in the country's energy history. That it did so reflects genuine effort by government, by the Petroleum Division, and by an OMC sector that kept fuel moving while simultaneously financing a government subsidy, holding mandatory stock at tripled cost, and managing an accumulating compliance burden.

The industry engaged constructively throughout. It deserves a response that matches that constructiveness, not more directives, but a genuine, time-bound reform agenda that treats the downstream sector as a partner in national energy security rather than a variable to be managed. The opportunity is real. The cost of missing it is now measurable.

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