Increase in oil price may cause chain reaction

Feb 21 - 27, 2000

While a handful of share holders are celebrating the unprecedented 90 per cent final cash dividend declared by Pakistan State Oil (PSO), the poor masses are being crushed under the ever growing oil prices causing multiplier effects on general prices whenever they are enhanced in Pakistan.

People were taken aback by the two announcements which include — 15 per cent increase in furnace oil by the government and 90 per cent cash dividend by public sector organization PSO last week.

In a way the announcements create an impression that policy is to squeeze money from the general people and distribute among a few share holders. PSO declared the 90 per cent dividend due to what it called an impressive profit it earned for the year ended June last year which is 45 per cent higher than the profit it earned previous financial year. Earning a profit in a regulated market where 72 per cent of the market share is controlled by a single company cannot be described as an impressive performance.

The company posted profits for the year 1998-99 at Rs2,617 million as compared to Rs2242 million for the year 1997-98.

PSO sold 12.1 million tonnes of petroleum products as compared to 12.7 million tonnes in the previous year. The market participation during the year under review was 72.8 per cent as compared to 76.8 per cent in previous year. This decline in sales was due mainly to lower off-take by independent power projects (IPPs). The turnover for the year was Rs116 billion as against Rs121 billion during the year 1997-98


It may be mentioned that with the 15 per cent increase in furnace oil prices the existing price of Rs7285 per tonne has gone up to Rs8377.75 per tonne in one go. The official announcement regarding increasing in furnace oil was made on Feb 17.

The last increase in furnace oil price was made only about two months back i.e. on Dec 11, 1999 when it was raised from Rs6070 per tonne to Rs7285 per tonne. The increase in furnace oil prices has been made due to increase in the oil prices in the international market reaching the mark of $30 per dollar which is highest of the decade.

Despite the assurances given by the government that the electricity rates will not be raised with 15 per cent increase in furnace oil price, its over all effects on production cost of all other industries including power generation cost will definitely effect the economy. Earlier the government had announced a 10 per cent increase in petroleum products on Dec.11, 1999 which had pushed up the petrol prices from Rs26.04 per litre to Rs29.

Since the international oil prices are surging steadily and are likely to cross the mark of $30 a barrel there are strong indications that the POL prices may further increase in Pakistan. Another possible increase in petroleum products is likely to add Rs3-4 in the petrol prices per litre.

Although the government policy is to revise the oil price downward if the prices of oil decline in the international market but there are very remote possibilities of a decline in oil prices in near future.

Import bill

During the first half of the current financial year, the import bill on account of oil has already crossed the mark of $1 billion and there are strong signals that ever increasing international oil prices, the total import bill for the current fiscal could be over $2.6 billion creating a yawning gap in trade deficit this year.

The oil import bill during first half of the current fiscal i.e.(July-January 2000) has already registered an increase of around 83 per cent as compared to the corresponding period of last year.

During first half of the current fiscal country imported 6,558,783 tonnes of petroleum products at a cost of $1,006.891 million while the imported quantity last fiscal year was 5733.288 tonnes costing $ 532.530 million. The percentage change in quantity is 14.40 per cent while it is 89.08 per cent in value.

The import of 2,582,001 tonnes of petroleum crude during this period cost $436.101 million as against the 2,686,283 tonnes values at $241.612 million during the corresponding period last year. The import decreased by 3.88 per cent during this period but its value increased by 80.50 per cent.

The situation demands that immediate steps are needed to develop the gas reservoirs already proven in different parts of Sindh, Balochistan as well as in Punjab. The natural gas which can reduce our dependence on oil can be imported at a much cheaper rate from Turkmenistan and Qatar. The political instability in neighbouring Afghanistan which has held the $2 billion gas pipeline project from Turkmenistan in abeyance, we have yet another option to bring gas from Qatar. It is strange that despite a general consensus that gas offers a much cheaper alternative to oil Pakistan continues to depend on oil imports. It is hoped that the present economic managers, who have come out with the agenda of economic revival and poverty alleviation programmes would take remedial steps to avoid chain reaction due to increase in oil prices. Key to the problem lies in switching over from imported oil to gas.