IMPLICATIONS OF HIGH OIL PRICES

SHABBIR H. KAZMI
Nov 02 - 08, 2009

Having touched the peak of US$147/barrel last year, crude oil prices are still hovering around $80 and causing adverse impact on Pakistan's energy starved economy. Not only foreign exchange reserves of the country come under pressure but high inflation also erodes competitiveness of the local manufacturers. A sequential impact is circular debt plaguing the entire energy sector. The problem is further compounded when the government tries to maximize collection of development levy on petroleum and gas.

The present government often holds previous regime responsible for many of the economic malaises including circular debt and it is said that both the electricity and gas tariffs have to be increased up to 30% to resolve the circular debt issue.

However, these blame game players are completely ignoring more contentious issues like exceptionally high transmission and distribution losses of electricity distribution companies and rising unaccounted for gas (UFG) percentage of the gas distribution companies. Less attention is paid on recovery of outstanding dues and rationalizing tariffs.

Failure in developing alternative sources of energy and excessive reliance on fossil oil has constantly increased the oil import bill. Efforts were often made to switch to gas from furnace oil to attain two objectives i.e. containing oil import bill and improving financial health of power generation companies. However, the attempt has resulted in faster depletion of gas reserves and its load shedding during winter.

Over the last two decades much has been said about huge coal reserves present in the country but failure in establishing coal-fired power plants leads to one conclusion that lobby of oil marketing companies is stronger than the government of Pakistan.

The declining share of hydel power in total electricity generated in the country has not only inflated oil import bill but also increased average cost of electricity generation in the country. It may be true that Kalabagh Dam became victim of political controversy but it is beyond comprehension what stopped the policy planners from construction of any other facility.

It seems that all except the politicians understand the importance of dams and hydel power plants. It was known to all and sundry that Pakistan has to construct dam equivalent to Mangla and/or Tarbella in every decades to ensure sustained supply irrigation water and low cost power generation.

The last mega size dam was completed in 1976 and since then no other dam has been constructed over the last 33 years.

It is also true that multilateral donors have also been opposing large mega size dams and supporting the 'oil lobby' by denying funds for hydel power projects and providing money for the construction of thermal power plants. Their rationalization is that mega size dams are a threat. They completely ignore the adverse impact of burning furnace oil containing high sulfur, leading to acid rains in the adjoining areas.

Pakistan needs dams for the storage of water for irrigation and also generation of electricity. The country is capable of generating 40,000MW hydel power and in most of the cases there is no need to construct any water reservoir, these projects are commonly known as 'run of the river' type. The beauty of these projects is very low capital cost and no displacement of people or fertile lands submerging under water reservoir.

However, there is a warning also that a minimum quantity of water discharge into sea has to be ensured else seawater will intrude into the delta and ruin the fertile land. It has been observed that whenever the country faces acute shortage of water some of the areas of Sindh are inundated by Arabian Sea water. Kotri downstream areas often look like sand dunes, also affecting adjoining fertile lands.

It is also pertinent to point out that increase in cultivation of sugarcane in lower Sindh can help the country achieve two objectives, lowering cost of production of sugar and containing oil import bill though enhanced production of ethanol. The real advantage is that sugarcane grown in lower Sindh gives as high as 11.5% recovery as compared to an average recovery of 7.5% in certain areas of Punjab. It is mainly because the climate and soil conditions of the areas are not conducive for the cultivation of sugarcane. The plantation has started only because sugar mills have been established in the adjoining areas by the politicians enjoying access to power corridors.

The looming electricity and gas shortage should open the eyes of policy planners suffering from myopia. The country should simultaneously work expediting exploration in the country and utilizing the available resources efficiently. The coal advantage must be exploited. It would yield two benefits lowering cost of electricity generation and ushering prosperity in coal rich areas. It must be kept in mind that the coal treasure cannot be exploited unless the required road and rail network is established. Why waste more time, start work immediately and complete the work in shortest possible time.

It must be remembered that inadequate supply of energy products and their higher prices are affecting GDP growth of the country. Distribution of stipend or introduction of support programs could provide temporary relief but people need sustained income through job creations, which are not possible without creating new productive facilities. If existing industries are a victim of load shedding of electricity and gas how the policy planners can expect entrepreneurs to establish new productive facilities.