Hike in international oil prices may leave impact on Pakistan’s economy

The hike in international oil price would leave a negative impact on our economy, as the anticipated price rise will increase the import bill and add pressure on foreign exchange reserves. This may push authorities to revise the electricity tariff upwards under fuel price adjustment.
The upward trend in oil price globally is all set to add its impact on the already widening twin deficits (trade and current account), as every $10 per barrel rise in international oil prices increases Pakistan’s import bill by $1.25 to $1.5 billion per year.

Oil prices are always debatable and remain an important variable in determining the economic activity of any country. The size of oil prices increase depends on the i)- share of the cost of oil in overall GDP, ii)- the degree of dependence on oil (total value of import oil) and iii)- consumption of oil domestically, and iv)- dependence on alternative sources of fuel. It was already projected and estimated globally that the oil demand is expected to increase ninety eight million barrels/ day in next four year (2017) and 118 million barrels / day during next twenty years (in 2030). The time of cheap availability of all kinds of fuel has gone because of fast increase in population, which ultimately increase the demand for energy domestically and national and overall worldwide.

Economists foresaw that crude oil (Brent) price may rise to $60 per barrel by June and July this year. Prices had hit a record high of $147 per barrel just before the financial crisis gripped world economies in 2007-08 and touched the bottom of $32 per barrel earlier. Macroeconomic concerns are paramount, but there are also micro economic ones. Lower fuel subsidies in some oil-producing countries, aimed at plugging budget deficits, are encouraging car owners to drive less miles.

They said the surge in petroleum product prices would take prices of all other commodities up along with it. This will add inflationary pressure in the economy. They also said that Pakistan has missed the opportunity of reviving its ailing industries, as it did not pass on the impact of steep decline in international oil prices when they were hovering at sharply lower levels.

The price of fuel has tendency to increase further till the demand growth is curbed and new technologies are introduced which reduces dependency on oil. In Pakistan, the justification for this increase is given by Oil and Gas Regulatory Authority (OGRA) on various grounds. Huge rise in world oil price shifted the burden to the consumers as government is already running severe losses and equally shifted this burden to households. Also consumption of kerosene oil, diesel oil and petroleum products at household level also increase. OGRA also justifies to shift this burden to household to some extent which disturb their food budget also.

Experts maintained that Pakistan is a net oil importer and meets about 75% of needs through imports. Oil imports carry the heaviest weight in total imports of the country. Oil payments – which had been declining for the eight consecutive quarters – reversed trend in the second quarter of FY17 and tacked onto an already elevated non-oil bill. Resultantly, the quarterly current account deficit rose to $2.2 billion in 2QFY17, bringing the cumulative deficit for first half to $3.5 billion. According to them, imports of all fuel oil products, particularly high-speed diesel and petrol, have shown significant growth this year, indicating a strong transport sector activity. This has come with a hefty increase in imports of buses and heavy commercial vehicles. Similarly, increase in power generation from furnace oil in 1HFY17 led to higher imports of the fuel.

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