OIL PRICES: WORRISOME FOR THE EMERGING ECONOMIES

International experts have forecast the rates might touch $70 a barrel in the coming months

By HARIS ZAMIR
Aug 08 - 14, 2005

Oil prices are the real contributors for increase in trade deficit and inflation during the last fiscal year.

Observers believe that with the crude prices hovering over $60 a barrel and some of the international experts have forecast the rates might touch $70 a barrel in the coming months. The exorbitant oil prices are feared to be the immense financial burden, widening the deficit, putting pressures on borrowing, widening current balance and import bill.

Experts were of the opinion that the increased economic activity raised the oil bill as the consumption of furnace oil, major contributor in the nation's import of oil, rose sharply in the last fiscal year because of decline in hydel power generation.

The galloping economy of Pakistan paid no heed to the rise in domestic petroleum products (POL) prices during FY05. The industry evidenced a colossal rise in fuel oil's demand as the power producers switched from hydel to thermal power generation. However, with the start of second half, sales plummeted thanks to adequate water and gas supply. Nevertheless, the industry managed to register a 26 percent rise in FO sales. On the other hand, HSD sales gathered pace during the last few months where sales grew by more than 10 percent for June 2005. The underlying force was the commencement of harvesting season in the country.

Ali Hussain, Research Analyst at Investcapital Securities, said that the unprecedented growth in agricultural sector of the economy also trickled down to the growth in HSD's demand. Jet fuel jumped with new routes and frequent flights, jet fuel's demand also surged despite the fact that JF is a deregulated product and is priced in line with the price changes in international oil markets.

INDUSTRY SALES PERFORMANCE

 

FY05
('000 tons)

FY04

Growth
(%)

Furnace oil

4,555

3,629

26

High Speed Diesel

7,696

7,421

4

Motor gasoline

1,329

1,257

6

Jet fuel

920

795

16

Kerosene

231

258

-11%

Light diesel oil

160

190

-15%

TOTAL*

14,892

13,548

10%

Since May 2004 a total of 16 fortnightly oil price revisions have occurred into Pakistan. Out of these, oil prices have been increased 8 times whereas no change has occurred in the remaining 8 revisions.

Change in local oil prices during FY05, all in rupees and in liters barring furnace oil, i.e. rupees per ton.

 

July 1, 2004

July 1, 2005

(%) Change

HSD

24.37

31.74

30.24

HOBC

40.87

54.33

32.93

Mogas

36.92

48.96

32.61

LDO

21.05

27.84

32.26

Kerosene

24.00

29.53

23.04

FO Rs/ton)*

13,359.06

19,484.45

45.85

Lower increase in domestic prices is due to lower taxes (PDL or Petroleum Development Levy) on oil products during the above-mentioned period. However, by keeping prices low compared to the international oil prices the government has incurred a loss of Rs 58 billion since May 2004 on lower PDL collection. Of this loss Rs 17.5 billion is direct subsidy to the domestic oil consumers. The government has already delivered Rs 7.5 billion to the oil marketing companies whereas another Rs 10 billion is payable to them.

In anticipation of higher international oil prices and as a reflection of government policy to subsidize local oil consumers, the government has set a target of only Rs 15.9 billion for PDL collection on oil sales from FY06 versus initial target of Rs 47.5 billion in FY05. FY05 PDL collection target was subsequently revised downward to Rs 10.9 billion.

Abdul Rasheed, Oil and Gas Analyst at Jahangir Siddiqui Capital Markets Ltd., said that the implications of higher oil prices will be negative for fiscal as well as external sector. On the domestic front, higher POL prices will lead to inflationary pressures as oil prices, directly and indirectly, have a significant effect on general level of prices in the country.

While PDL tax revenue collection is likely to remain lower than historical numbers, total tax revenue collection from oil sector (inclusive of 15% GST) is likely to remain satisfactory as due to higher oil prices there has been significant growth witnessed in the GST collection from the sector.

Oil import could further rise in FY06, from FY05 number of $4.2 billion, as prices at present are nearly 30 percent higher than the average of FY05. This is likely to keep trade deficit close to US$4.6 billion estimate announced by the government.

With reserves of close to US$12.6bn, high remittances and privatization inflows, we do not expect major impact on the exchange front in the near term.