OIL PRICES

Present cap on the prices petrol and petroleum products will continue

From SHAMIM AHMED RIZVI,
 Islamabad

Nov 01 - 07, 2004

Public at large have taken a sigh of relief on the announcement made by Dr. Salman Shah, Advisor to the Prime Minister on Finance that the present cap on the prices petrol and petroleum products will continue and the government will counter the negative impact of oil price hike in the international market through other revenue sources without burdening the oil consumers.

The government has been well advised to take this timely decision. The rumors that selling prices of petroleum products specially motor gasoline and diesel will be increased after Eid and a part of unprecedented price hike in oil prices in the international market would be passed on the consumers has created a panic in the relevant circles. Any further rise in the retail prices of petrol and petroleum products it was feared, would take inflation to an alarming level unbearable for the public at large.

World oil prices have bolted to a record high of $55 a barrel from $36 a few months back. With approaching winter and increase in demand may further add to price hike. Pakistan's economy has been hit hard because of this continuing rise in oil prices. The government has managed to buffer the economy from the oil shock of almost 75 per cent hike in oil prices in the past few months, but it has done so by depriving it self from one of its major source revenue Petroleum Development Surcharge which contributed about Rs. 60 to 65 billion to country's annual revenues. The hole caused so far is luckily not so big and it could be managed because there has been higher than expected revenue from other sources. But if this hikes continues it may lead to widening the budget deficit.

Admitting that Pakistan economy has been hit hard by the oil price hike, Dr. Salman Shah, confidently announced that the government would continue to counter the impact through revenue such as the Central Board of Revenue. He accepted the fact that unprecedented rise in oil prices and in consequence a higher import bill had weakened pak rupee. However, the government was monitoring the situation with reference to on going international situation, our development programme and fiscal deficit, he added. Our oil import bill has multiplied mainly because of price hike but partly for enhanced oil requirement because of increased economic activity in the country.

It is high time world opinion and the United Nations prevail on the United States and the Britain to put an end to Iraq war which has without any doubt, contributed significantly to the fear premium that the world oil markets are currently being forced to move up. The whole world is suffering because of the follies of few persons for their misadventure in Iraq.

A Congressional Committee in Spain has recently concluded through a research study that "had there been no war on Iraq, oil price today would have in the vicinity of $ 30 a barrel. Even in this scenario of elevated oil prices, the Opec producers are looking forward to maintain prices around $ 30 a barrel band. Had there been no war on Iraq, the world would have been enjoying a price of very much around that Opec elevated target band. That means all other conditions, same as currently, the fear premium and the impact on crude prices because of the Bush war on Iraq is roughly around $ 20 a barrel. A staggering figures indeed".

The war on Iraq has impacted many elements of the delicate demand supply balance in the global crude markets. After nearly a year and a half of the US invasion, the Iraqi oil infrastructure is in doldrums. There is a regular sabotage of pipelines carrying Iraqi oil to the energy thirsty world. Refineries in Iraq are constantly under threat of attack, resulting in compromised refining capacity in Iraq.

At the last count, the northern pipeline that carries oil to the Turkish Mediterranean port of Ceyhan has been blown up 37 times in 12 months. Terminals in the south at Basra have been attacked at least 10 times, shutting down all exports of crude oil.

Oil prices are continuously going up for the last few months. This unexpected rise has come as a crude shock to the Bush administration and all attempts are being made to relate the surprising phenomenon to ever-increasing economic growth and the resultant demand for oil in China. It is also finding shelter behind the excuse that threats of a strike by Nigerian oil workers are also keeping the market on edge. However, it is quite evident that the increase is mainly because of the follies of the Bush administration in Iraq. The ruling business interests in Washington and London invaded a weak and sovereign country to ensure uninterrupted and dependable supplies of oil at low prices but the deteriorating situation in Iraq has turned their dreams into nightmares. The United States and Britain are reaping the bitter harvest but the rest of the world has been made to pay a heavy price of their misadventure. Pakistan is one of the worst sufferers of this price spiral as it depends mostly on imported oil. The government deserves credit for not increasing the prices of petroleum products since first of July this year. As per the policy, every increase or decrease in prices of petroleum products in the international market has to be passed on to the consumers. However, in view of the negative impact of frequent increase, the government decided not to increase the consumer prices and absorbed the difference itself. According to an estimate, it has suffered a loss of over Rs. 20 billion on this account during the period. But the question arises for how long the government could afford to bear the loss and increase, if made, would not only be unbearable for the masses but would also impact on the economic growth. Under these circumstances, Pakistan will have to take measures to increase domestic production of oil significantly so as to lessen dependence on imports if not attain self-sufficiency. Geological studies confirm existence of oil and gas in different regions of the country but they remain dormant for want of exploration activity. Instead of taking piecemeal steps, major concessions and incentives should be offered to private companies to encourage them to undertake exploration and drilling. Like water vision, the government should also develop an oil vision on priority basis.