of years back when some of the energy sector experts warned that crude
oil prices may touch US$ 100 a barrel, most of the economists did not
agree with them. They had reasons to refute this because crude oil
prices were hovering around US$ 50 a barrel at that time. They were
also insisting that the price would settle around US$ 30-40 a barrel.
However, when price touched almost US$ 70 per barrel, even the
conservative economists were forced to change their opinion.
the general consensus is that the recent surge in crude oil prices is
not due to demand but entry of speculators into the oil trade. The
presence of speculators is often evident from the divergent movement
of prices. One such evidence was when hurricanes were considered a
threat for offshore drilling rigs in the US the prices moved in the
opposite direction. Many analysts are of the view that the speculators
often create a hype, which leads to hike in price but very soon profit
taking becomes name of the game. Saying this, energy sector also say
that gone are the days when crude oil used to sell at less US$ 20 a
barrel. They also say that people must remain ready to see price
touching US$ 100 a barrel over the next couple of years or may be
also say, "Normally the price of a commodity is driven by its
demand. However, in case of crude oil supply seems to be driving the
price." One often reads in newspapers oil price going up due to
either political uncertainty in the Middle East or strikes in one of
the oil producing countries. But rarely rising demand is termed a
factor responsible for price hike. Similarly, there is always pressure
on oil producing countries to increase daily output but developed
countries are hardly to curtail their POL consumption.
a number of arguments is put forward in favour of raising daily crude
output, but least is said about the global refining capacity. Some of
the analysts are of the view that shrinking surplus refining capacity
has become a serious impediment. Even if crude oil production is
increased the refineries would not be able to process it. The refining
capacity needs a quantum jump to meet the growing demand for POL
products, particularly higher distillates. However, the laws
pertaining to environment are forcing closure of refineries in the
developed countries, which are also the biggest consumers of POL
objective behind exploring the prevailing and the emerging global
scenario is to help Pakistan's policy planners and the industries to
prepare a strategy to minimize the shock to the economy due to hike in
POL prices. The country faces a number of potential threats, which
include decline in foreign exchange reserves, pressure on exchange
rate, rising inflation rate and eroding purchasing power of the
masses. All these threats can derail the process of economic
first and the most important issue is that Pakistan's economy is
highly dependent on oil and the economic managers have been failing in
exploiting alternate sources of energy. On top of this power plants
and industries also suffer from poor efficiency levels. Despite having
trillions of tons of coal its use has remained negligible, only
because the country has not been able to exploit it. Whatever quantity
of coal is used in the country bulk of it is imported.
is considered the most important source of energy. In the past bulk of
electricity in Pakistan was produced at hydro power plants but its
share in the total generation has reduced very substantially. Two
factors are responsible for this 1) inability of the country to build
new hydro power plants and 2) establishment of more and more thermal
power plants to meet the growing demand for electricity. One may say
that output of hydro plants is dependent on availability of water and
the country has been suffering from acute shortage of water.
Therefore, its dependence on thermal generation has been high.
However, many sector experts say, "We have opted for an easy
solution. We have been establishing thermal power plants and ignoring
an option which can help in achieving twin objectives, enhancing water
availability and reducing cost of electricity".
often said that Pakistan being deficient in fossil oil has to face the
adverse impact of its rising price. It may be partly correct but
reality is that for decades the country did not pay much attention to
enhancing oil output in the country. It was only recently that the
government started offering incentives to exploration companies.
However, the country has not succeeded in attracting the desired level
of investment. Bulk of the oil and gas is being produced by the
companies like PPL, OGDC, POL, which have been operating in the
country since long. The new entrants have yet to make any significant
the critics of present Petroleum Policy say that in an attempt to
attract foreign investors (exploration and production companies) the
government has offered incentives, which could have serious
repercussions. The incentives may help in attracting the investment
but it would also lead to very high cost of oil and gas for Pakistan
and huge repatriation of profit by the investors. They also term the
situation similar to the one being faced in the power sector. Offer of
all the possible incentives did help in establishment of independent
power plants but consumers of electricity are paying the cost through
their noses now. The losses of state owned transmission and
distribution companies have gone up due to purchase of electricity
from the IPPs. The supporters of Power Policy may say that had the
IPPs not established the situation would have been even worst. They
may be right but can they refute that the government offered a tariff
which was exceptionally high and also undertook all the risks,
sponsors were kept immune from all types of the risks.
the critics question even the basic premise of the Power Policy,
allowing establishment of power plants in the private sector and
keeping state owned utilities responsible for transmission of
distribution. They say, "It is true that state owned power plants
are inefficient but the real cause of the ailment of state owned
utilities are huge transmission losses. In fact the private sector
should have been asked to takeover transmission and distribution
business, which also needed huge investment. To substantiate their
argument they refer to KESC. It is on record that the number of units
billed during a year is often less than number of units dispatched.
This means that whatever the KESC is spending on purchase of
electricity from IPPs does not generate even one rupee revenue for the
the mechanism followed for fixing fortnightly prices of POL products
is also being questioned. Though, Oil Companies Advisory Committee (OCAC)
is often held responsible for the price hike, one has reasons to
believe that it revises prices in the light of guidelines provided by
the government. It was also said that OCAC enjoys advantage because it
has no representation from the government as well as the general
public. However, it is not the composition but the guidelines, which
are responsible for price hike.
the government has been relying on collection of the petroleum
development surcharge as a toll to bridge the gap between revenue and
expenditure. Some of the critics say that the policy is still being
followed and in an attempt to save the face a number of taxes have
been camouflaged under the cost of products. Whatever may be the fact
it is extremely necessary to rationalize the retail prices, which is
hurting the economy as well as the government. Based on the existing
formula the government is paying billions of rupees subsidies to the
oil marketing companies. While these companies are benefiting from the
subsidy consumers as well as the government are suffering.
the government has been following the policy of switching over of
power plants from furnace oil to gas in an attempt to bring down the
cost of generation. However, analysts question the rationale as they
believe that it would neither help in bringing down the electricity
tariff nor the country. They say burning gas at the power plants is
like cooking food by burning dollars. They also say that if rest of
the world can use coal in power plants why Pakistan can't do the same.
They have only found an easy solution rather than taking pain of
developing mining and processing of coal. In this effort they are
depleting gas resources at a much faster pace.
the supporters of use of gas in power generation say that if the
country faces shortage it can rely on other gas producing countries.
The effort has already started in the shape of three gas pipeline
projects. However, the outlook of these pipelines remains uncertain.
Iran-Pakistan-India pipeline project faces pressure from the US. While
both India and Pakistan claim of not facing any pressure and also
claim to decide the fate keeping their interest in mind, the
probability of delay is high. Outlook for
Turkmenistan-Afghanistan-Pakistan pipeline seems bright due to the US
support but a lot depends on the situation in Afghanistan. The allied
forces have not succeeded as yet in restoring peace in Afghanistan.
in view the ground realities the practical approach should be to
develop alternate energy resources. Out of these the most important is
construction of mega dams in the country as it will help in
construction of water reservoirs as well as generating low cost
electricity. A lot of time and money has been wasted on unfruitful
debate on Kalabagh dam. If it is not acceptable to all the four
provinces some alternate site has to be agreed upon at the earliest.
consensus on a new site may take some time. Therefore, the policy
planners should follow two pronged policy - installation of windmills
in the coastal areas and development of coal mines on war footings.
Coastal areas of Sindh (including Karachi) and Balochistan are ideal
for installation of windmills. Karachi faces acute shortage of
electricity and KESC suffers from high cost of generation. Therefore,
installation of windmills will help in overcoming both the problems.
latest attempt to privatize KESC has fizzled out, technically. The
efforts are going on to convince the second highest bidder to takeover
its control. It is necessary to reiterate that instead of selling it
at a throwaway price to private sector the government should split it
into five smaller sizes as manageable entities and then try to sell
it. The government must also explore the option of allowing the
private sector to set up integrated utilities in SITE and Landhi
industrial areas to meet the electricity demand of industries and
confine KESC to supply electricity to commercial and domestic
deciding about new generation capacity the fact should be kept in mind
that WAPDA will also face the shortage in the near future. It would
not be able to meet Karachi's electricity requirement. Karachi's peak
electricity demand has exceeded 2000MW and the combined capacity of
KESC and the two IPPs operating in its franchise is not sufficient to
meet this. If part of electricity produced at HUBCO is diverted to
Karachi this may help in meeting Karachi's requirement but it would
also lead to a shortfall for WAPDA.
country has to increase production of oil and gas as well as develop
alternate sources of energy. Self sufficiency of energy products at
affordable prices is a must to sustain economic development. The
planners must revisit Power and Petroleum policies. While the effort
should be to attract the maximum investment the affordability factor
should not be overlooked. They have ignored the affordability factor
in the past and the same mistake should not be repeated. The
prevailing situation is alarming and the solution has to be found at
the earliest, don't wait until dark.