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Rising oil prices — opportunity or threat?

The rising oil prices are the major concern for all the developing economies and Pakistan is suffering from it too. 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.

Not only that, low oil prices were instrumental in keeping the general price level from rocketing. Thus more than any other factor, low oil prices were responsible for single-digit inflation during last two years. But the higher oil prices will stoke inflation and put pressure on the balance of payment position and foreign exchange reserves. Since oil is the major source of electricity generation in Pakistan, the hike in petroleum products’ prices may make it difficult to significantly ease power outages. The silver lining is that increased oil prices will push up economic growth in Gulf countries, which are a major source of remittances for Pakistan. Needless to say, the remittances are one factor that has sustained the economy over past several years.

Growth in remittances has slowed down in the current fiscal year which could be attributed to reduced global oil prices causing a cut in public spending in the oil-rich Arab countries. After all, the share of remittances from the oil-rich Gulf nations in Pakistan’s remittances is almost 65 percent.

Despite record-low oil prices, the number of Pakistani workers going to the Gulf countries has risen in recent months, the State Bank of Pakistan (SBP) said in its latest report on the state of Pakistan’s economy. As many as 946,571 Pakistanis went abroad in Jul-Dec 2015, which translates into a growth rate of 25.8 percent over the same period of 2014, statistics released by the Bureau of Emigration and Overseas Employment show. In fact, the number of Pakistani workers going to Saudi Arabia, Qatar and Oman increased 67 percent, 26.9 percent and 20.1 percent, respectively, over the same period. This suggests the impact of falling oil prices is yet to translate into lower labor demand from the Gulf Cooperation Council (GCC) via reduced spending on infrastructure and transport.

The cost-push inflation caused by the oil price hike ensues from our reliance on oil as major source of energy. We produce 64 percent of our energy from oil, gas and coal based operations. Besides increasing domestic oil output, we will have to gradually do away with the use of oil for power generation. Use of oil by the transport sector should also be minimized by adapting to CNG based transport system. Modern mass transit projects also need to be designed and completed on an emergency basis. This will not only minimize the use of private transport but will also improve the fast deteriorating traffic situation throughout the country.

New investment in the field of oil and gas exploration will have to be attracted by offering incentives to the local and foreign investors. These incentives should be well thought out and based on a win-win theory. We have sufficient gas reserves which, if properly exploited, can give our economy a real break.

Another option is to switch from oil-based to coal-based energy. Coal is globally considered as one of the most important source of energy. Pakistan is said to have about 185 billion tons of coal deposits located in Sindh, mainly at Thar. It is unfortunate that a viable national coal policy yet remains to be evolved. Coal-based energy projects require mining facilities and supporting infrastructure. In the absence of a feasibility report and a consensus on tariff, the Thar project is being unduly delayed. An early use of domestic coal reserves also seems a distant possibility as the requirement of cement sector is being met through import from Indonesia.Hydro power is also a cheap and clean alternate source of energy. Pakistan produces 34 percent of its energy from water.

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

However, the recent OPEC agreements are 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. An increase in oil price leads to inflation, increase budget deficit and puts downward pressure on exchange rate which makes imports more expensive. The increase in oil price has further effect on the daily consumption pattern of households. However, a lower government spending, a higher real stock price and a lower interest rate would raise real output for Pakistan. The antidote to the sky rocketing oil prices is a concerted effort to achieve major breakthrough in the areas of gas exploration, enhanced hydro power generation and coal-based energy production.

The writer is a Karachi-based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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