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HIGHER OIL PRICES AND IMPLICATIONS FOR PAKISTAN

Higher Oil Prices And Implications For Pakistan

Pakistan’s economy has routinely oscillated between periods of relative stability and busts brought about by external payments crises. Failure of successive governments to push through structural reforms when the economy is stable typically drives this volatility. In the last few years, Pakistan has failed to push through these reforms, raising the likelihood of economic turbulence in the midst of global economic headwinds.

Pakistan has binged on cheap dollar debt to raise over $35 billion in external debt since 2013. Oil prices, which fell to under $50 a barrel from over $100, brought about annual savings of over $7bn during this period. A stable rupee allowed the country to import greater amounts of capital goods required for generating power and building public infrastructure. The increased spending on infrastructure, rising foreign currency reserves, and benefits of the IMF programme restored stability and brought about a rise in GDP growth.

Following four years of relative stability at around $105 per barrel (bbl), oil prices have declined sharply since June 2014. It is not the first sharp oil price swing. Falling oil prices often affect activity and inflation by shifting aggregate demand and supply and triggering policy responses. On the supply side, lower oil prices lead to a decline in the cost of production. The lower cost of production across a whole range of energy-intensive goods may be passed on to consumers and hence, indirectly, reduces inflation. The lower cost of production can also translate in higher investment. On the demand side, by reducing energy bills, a decline in oil prices raises consumers’ real income and leads to an increase in consumption.

Abrupt changes in oil prices, by increasing uncertainty, can also reduce investment and durable goods consumption. To the extent that the return from an irreversible physical investment project depends on the price of oil, increased uncertainty about the future price of oil could cause firms to delay investment and reduce capital expenditures. Following a similar mechanism, uncertainty associated with sharp movements in oil prices can also hinder consumption of durable goods.

As a consumer, you may already understand the microeconomic implications of higher oil prices. When observing higher oil prices, most of us are likely to think about the price of gasoline as well, since gasoline purchases are necessary for most households. When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services. The same goes for businesses whose goods must be shipped from place to place or that use fuel as a major input (such as the airline industry). Higher oil prices tend to make production more expensive for businesses, just as they make it more expensive for households to do the things they normally do.

SOURCE OF THE OIL PRICE MOVEMENTS:

The impact of oil prices on activity depends critically on their source. Oil supply shocks would be expected to generate an independent impact on activity. In contrast, oil demand shocks would themselves be the outcome of changing real activity with limited second-round effects. Indeed, oil price changes driven by oil supply shocks are often associated with significant changes in global output and income shifts between oil exporters and importers. Changes in prices driven by demand shocks, on the other hand, tend to lead to weaker and, in some studies, insignificant effects.

 

SUCH EFFECTS DIFFER ACROSS COUNTRIES:

Benefiting oil importers but harming oil exporters. The expected positive impact of an oil price decline on the global economy reflects the benefits from lower oil prices for some of its largest economies like Pakistan among of them.

Historically, oil price swings and inflation have been positively correlated, even though this relationship has varied widely across countries. Large increases in oil prices during the past 40 years were often followed by episodes of high inflation in many countries same as the case herein Pakistan. As in the case of output, the impact of oil price swings on inflation has, however, declined over the years.

I’ve just explained how oil prices affect households and businesses; it is not a far leap to understand how oil prices affect the macro economy. Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. As mentioned above, oil prices indirectly affect costs such as transportation, manufacturing, and heating.  The increase in these costs can in turn affect the prices of a variety of goods and services, as producers may pass production costs on to consumers. The extent to which oil price increases lead to consumption price increases depends on how important oil is for the production of a given type of good or service.

Oil price increases can also stifle the growth of the economy through their effect on the supply and demand for goods other than oil. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them. In economics terminology, high oil prices can shift up the supply curve for the goods and services for which oil is an input. High oil prices also can reduce demand for other goods because they reduce wealth, as well as induce uncertainty about the future. One way to analyze the effects of higher oil prices is to think about the higher prices as a tax on consumers. The simplest example occurs in the case of imported oil. The extra payment that consumers make to foreign oil producers can now no longer be spent on other kinds of consumption goods.

The recent decline in oil prices will have significant macroeconomic implications. If sustained, it will support Pakistan growth and disinflation. It will also trigger significant real income shifts from oil exporters to oil importers, strengthening growth and reducing inflation in a large number of oil- importing countries.

Allah has gifted KP with a lot of natural resources like Oil, Gas, Marble mines, Gem Stone, Emeralds etc. KP is the highest oil producing province of Pakistan that contributes 57% of crude oil to the indigenous production. Many national and international companies have invested in KP for Oil & Gas and it was concluded that KP produces the best quality of crude oil. Many oil producing areas/blocks remained ignored by the companies to invest and drill those areas.

The Government of Pakistan is committed to fully resolve the county’s energy crises. The investment friendly policies of government have resulted in increased domestic oil & gas production, and for the first time in the history of Pakistan oil production crossed over 100,000 barrels per day in 2014/15 and by 2025 KPOGCL target is 200,000 BOPD. The success ratio for exploration of hydrocarbons resources in Pakistan is 1:2.18 which is highest among the world and the well head price is highest in KP as prescribed by Petroleum Policy 2012. Khyber Pakhtunkhwa has the potential to further attract investors in the upstream sector and enhance indigenous oil & gas resources

The total recoverable potential of KP is 1.1 billion barrels of oil equivalent and total recoverable gas assets as are 16 Trillion Cubic feet. Back in 2014 only 2 exploration blocks were active and today 27 blocks are active in Khyber Pakhtunkhwa. The paradigm change shows the commitment of Govt. of Khyber Pakhtunkhwa towards the indigenous resources exploitation. KPOGCL has been adversely trying every pursuit to exploit above mentioned figures. KPOGCL has identified 7 new perspective blocks in whole of Khyber Pakhtunkhwa. By the grace of Almighty Allah, KPOGCL is striving to increase indigenous oil and gas production to boost Pakistan’s economy and reduce Pakistan’s reliance on imported oil and gas and national exchequer.

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