GLOBAL OIL PRICES AND ITS IMPACT ON PAKISTAN

 

There is a forecast for 7 to 10 per cent increase in POL prices

By SHABBIR H. KAZMI
Sep 11 - 17, 2000

International oil prices touched a new 10-year high level during this past week, amid uncertainty regarding the level of increase in crude oil output to be decided in the OPEC meeting on September 10. While some analysts say that the price may touch US$ 40/barrel by the year end, others believe that the crude may come down to around US$ 28/barrel. Each group has its own parameters for the forecast but a lot depend on capabilities of the oil producing countries to contain speculation and to meet the enhanced demand.

Like other countries deficient in indigenous crude oil production there may be a need to adjust the prices of POL products upwards in Pakistan. However, the combined impact of global increase in energy cost can be far greater on country's economy. On the one hand the hike in POL prices will necessitate an immediate increase in electricity tariff and freight charges causing cost-pushed inflation. On the other hand while there will be higher pressure on limited forex reserves, Pakistan may witness decline in its major exports. Bulk of Pakistan's exports are to those countries which already face recessionary trend due to increase in crude oil price over the last few months.

Electricity Tariff: Many analysts had warned about the possible rise in electricity tariff when crude oil prices started moving up. Both WAPDA and KESC have already approached the National Electricity Power Regulatory Authority (NEPRA) to allow increase in electricity tariff an interim increase has been allowed pending formal proceedings. As compared to WAPDA, KESC is worst hit by increase in furnace oil price as its entire power generation capacity is thermal based. It is true that power generation companies are hit by increase in fuel cost but NEPRA must keep a fact in view that the T&D losses of both WAPDA and KESC are exceptionally high. The Authority must link increase in tariff with reduction in T&D losses.

Many analysts believe that the increase in output will have to be far greater than the anticipated 500,000 barrels per day hike as promised by OPEC. It is estimated that the current crude production is already more than production levels decided on June 21, 2000 at OPEC meeting. Saudi Arabia was supplying an additional 600,000 barrels per day since July 2000.

However, the real concern is the ability of some of the OPEC members to provide their share of enhanced quota which is causing speculative trading. Assuming the same percentage of quota allocation among OPEC members, even a 500,000 barrels per day increase will leave two major producers, Iran and Venezuela, in the deficit zone. Despite any increase, however, it can be expected that persistent low level of inventories will remain supportive of crude prices towards the upper end of the spectrum, at least in the immediate term.

Forex Reserves: Theoretically, the hike in crude oil price should be a source of immediate concern. However, due to recent financing arrangement entered with the Islamic Development Bank for import of oil, the country is not expected to face an immediate problem. Still, the quantum of deferred payment would mount significantly. Pakistan will have to boost its exports to meet future obligations which should be a cause of concern.

Domestic POL prices: Domestic POL prices are likely to be reviewed after the OPEC meeting scheduled for September 10. Firm international oil prices and rupee depreciation demands a further increase in domestic POL prices. The increase may range from 7 to 10 per cent for various products. It is expected that the GoP may increase diesel prices by a larger proportion in order to rationalize its price relative to motor gasoline prices.

Deregulation: After the deregulation of furnace oil trade the suppliers are keeping a strict watch on global prices. This has resulted in hike in furnace oil price with regular intervals. The GoP has also decided to deregulate HSD imports in December 2000. However, according to reports, the government will continue to regulate diesel prices. Besides this, the government is also considering a proposal to remove the freight pool and set POL prices depending upon the region-wise transportation cost incurred. This would imply that POL products would cost more in the Northern regions of the country relative to the Southern regions. The subsidy on kerosene is also expected to be withdrawn.

OPEC CRUDE PRODUCTION
as on 21-June-2000

Countries

Capacities

Existing
Quota

Increase

Surplus/
Deficit

Algeria

920,000

811,000

826,965

93,035

Indonesia

1,360,000

1,317,000

1,342,925

17,075

Iran

3,750,000

3,727,000

3,800,366

(50,366)

Kuwait

2,600,000

2,037,000

2,077,098

522,902

Libya

1,450,000

1,361,000

1,387,791

62,209

Nigeria

2,250,000

2,091,000

2,132,161

117,839

Qatar

730,000

658,000

670,953

59,047

Saudi Arabia

10,600,000

8,253,000

8,415,461

2,184,539

UAE

2,550,000

2,219,000

2,262,681

287,319

Venezuela

2,950,000

2,926,000

2,983,598

(33,598)

Total

29,160,000

25,400,000

25,900,000

3,260,000