OIL PRICE HIKE

Major concern of the world economies

By AMANULLAH BASHAR
Aug 16 - 22, 2004

The all-time high international oil prices posing a serious threat to the world economies as the adverse impact may stall the economic growth obviously Pakistan was not an exception to the threat.

Despite an unusual increase in oil prices in the world market, which touched a record high at $45 per barrel, the price level has been kept static in Pakistan for different reasons including on going campaign for by-elections in which Federal Finance Minister Shaukat Aziz is a candidate from Thar and Attock. Since he is to assume the office of the Prime Minister, the issue of increase in oil prices has been kept aside for the time being to avoid any public criticism; otherwise the oil prices in Pakistan are tied up with the fall and rise of price in the international market. The economic experts were of the view that the oil prices were not increase in Pakistan for the last two month despite gradual increase, however, now the time has come to pass on the difference to the consumers because keeping oil prices static would be contrary to the economic principles.

However, the level of government levies on oil in Pakistan was also on the higher side as according to target for the current year to generate revenues from oil and gas sector are estimated around Rs40 billion. This is the cushion where the economic managers are in a position to accommodate the exorbitant increase in the world oil prices, if the hike was allowed to affect, its multi-facet effects on investment, unemployment and growth rate may badly affect the targets set for the current financial year.

Luckily, the nature was kind enough to Pakistan, which has been, gift plenty of natural gas as well as huge coal deposits beneath the sandy lands of Thar. Now the time has come to accelerate the efforts for exploiting the given resources at the optimum level to protect the people of this country who are already facing the harsh economic constraints in the form of price inflation, unemployment and low rate of income as compared to the developed nation.

It is also the high time that the Organization of Petroleum Exporting Countries (OPEC) should be undaunted of the political pressures and take the notice of unusual oil price hike and seriously take concrete measures to increase oil production in the larger interest of the world economy especially the developing and under developed nations which have already passed through the agonies of the wave of terrorism having devastating the economic conditions of the poor nations.

Meanwhile it is feared that rising world oil prices would widen the trade deficit and raise the import bill in Pakistan while freezing of oil; prices locally would reduce revenue collection from petroleum development otherwise.

International oil prices remained firm in early 2003, but have been rising steadily since January 2004. The price of benchmark brent crude has risen by 38 percent, setting anew all-time record of $44-45 per barrel.

The global oil prices are touching historic highs. The main reasons are increasing demand from China, fast approaching winter season in North America, limited excess production capacity of OPEC and recent Russian government action against Yukos.

According to an analytical assessment by the Chief Economist of ABN AMRO Bank Sakib Sherani, the precipitous and unrelenting rise in oil prices has the potential to generate negative effects on Pakistan as well.

The transmission channels include higher import payments for oil and other commodities which would rise in tandem; possibly lower exports (if the global economy slows and partner country trade demand is effected, inflation (through the government decision to freeze domestic petroleum prices has blunted a major portion of direct impact on consumer prices; a higher fiscal deficit; higher interest rates (as a result of both the above factors; possibly slower economic growth and investment; quantifying some of the direct effects if international oil prices average $35 per barrel throughout the financial year 2004-05, it will add approximately $600 million in additional foreign exchange payments.

The pressure is exacerbated by the need to import furnace oil during the current financial year due to lower hydel power generation. Higher crude oil prices have two-fold impact on local economy. Pakistan imported $3 billion, which is about 19 percent of total import bill last year. If the current high oil prices remain constant throughout this fiscal year oil import bill is likely to touch $4 billion at the end of the 2004-05. Another impact is likely on the growing stock business in Pakistan. Obviously, the oil price increase would erode the profitability of the industrial sector, which may also have an adverse effect on the shareholders as well.

One thing which I would like to add here that governments in the past were using the gas pipeline projects just to make headlines in the newspapers for over a decade or even beyond that, however, practically speaking no serious thought was given on this aspect to make it a reality.

During the last decade countless meetings, discussions were held besides arrival of delegations from the concerned countries and the visits by Pakistan delegations to the relevant countries, but all these visits have proved as a joyride by the officials at the cost of the exchequer, while the project of importing oil through pipelines either from Iran or Central Asia practically speaking is lying in the deep freezer. Had this project implemented we could avoid price escalation of the project and remain out of the pressures of the international oil price hike as well.