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Pakistan needs prompt reforms as oil price hike likely to hit import bill, current account deficit

Oil prices may gradually rise towards $60 per barrel by the end of 2017: experts

The continuous rise in oil prices in the international market has raised alarm among developing countries, as the trend, if continued unabated, would cause problems to these countries including Pakistan mainly due to surge in current account deficit.

Analysts believe that oil prices will gradually rise towards $60 per barrel by the end of 2017. They cited the agreement reached between the Organization of Petroleum Exporting Countries (OPEC) on the one hand and non-OPEC oil exporters on the other, to cut back on oil production, and the rise in interest rates in the United States, as two major reasons for the expected surge in oil prices.

It may be noted that the price of oil is determined essentially by the interplay of demand and supply forces. When demand ratchets up relative to supply, prices go up; when demand ratchets down relative to supply, prices go down.

Analysts said, “It is not merely the actual demand and supply that shape price – the projected or perceived demand and supply also play a significant role. Speculations that oil demand will increase in the wake of acceleration in economic growth in major oil importing countries, will put an upward pressure on oil prices.”

According to them, OPEC manipulates oil prices by setting production targets or quotas for its members. Higher or lower agreed output levels have a corresponding effect on the world market oil price.

As per reports, on December 10, OPEC members reached an agreement with some major non-OPEC oil producing countries, including Russia, Oman, Brunei, Azerbaijan, Kazakhstan, Oman and Bahrain, whereby the latter agreed to cut their combined output levels by 558,000 barrels a day for one year. The two agreements will drive up world oil prices and thus bring substantial export revenue for the oil producing nations.

This agreement is a bad news for oil importing countries including Pakistan, whose economies have drawn immense benefits from the glut in the international oil market in recent years caused mainly by technology-driven doubling of the commodity’s output in the US.

Experts said petroleum products account for a substantial portion of Pakistan’s import bill. In 2011-12, Pakistan imported $18.9 billion worth of crude oil but courtesy of the steep fall in the commodity’ international price, oil imports came down to $7.9 billion in 2015-16. The savings on oil import enabled the country to increase the purchase of machinery and other capital equipment essential for development without having the current account deficit shoot up, they said.

Is our financial managers ready to cope with this development and set priorities, to tackle the situation? Apparently, things are moving ahead and we are just waiting the developments.

Another development is hike in interest rates in the US. There is a direct relationship between interest rates and the value of domestic currency. For Pakistan, the appreciation of greenback means depreciation of the Pak rupee.

Analysts said currency depreciation casts a significant impact on some key economic indicators. One, imports become expensive and should therefore decrease. The demand for the bulk of Pakistan’s imports such as oil, food and machinery, is largely inelastic meaning the price increase will not significantly reduce their purchases. Thus, on this account, the import bill is likely to go up.

It may be recalled that the government has imported petroleum products worth $38.673 billion during the last five years to meet energy needs of the country.

As per data made available to PAGE, petroleum products amounting to $ 9,422 million were imported in the year 2011-12, $8,282 million in 2012-13, $8,899 million in 2013-14, $7,411 million in 2014-15 and $4,659 million in 2015-16.

The said petroleum products were being maintained by oil marketing companies keeping in view their commercial requirements. As of December 6, 2016, reserves of HOBC were available for 122 days, Motor Spirit for 11 days, JP-I for 12 days, Superior Kerosene Oil for 15 days, High Speed Diesel for 23 days and Furnace Oil for 24 days.

SELF-RELIANCE

Pakistan needs to move fast towards achieving self-reliance in crude oil production by accelerating exploration of indigenous hydrocarbon resources. In the tenure of sitting government so far 32,000 bpd added in crude oil production, while additional 4,000 bpd oil would come to the system during the current winter, bringing the production capacity to 90,000 bpd mark.

Byco Petroleum Company had established the country largest production unit, having refining 120,000 bpd oil, in Balochistan last year. Presently, six oil refineries were operating in the country and they had full capacity to refine the product as per needs of the country.

Currently, 70 percent of the current oil demand was met through import and the government had planned to set up more oil refineries in the coming days.

In the wake of increase in oil prices in international market, national economy in Pakistan, which is already under pressure may face difficult situation, hence, our financial managers must start pondering over two latest developments as referred to above so as to face the situation.

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