Research Analyst
May 2 - 15, 2011

Oil prices, associated with bouts of inflation and economic instability over the last 30 years, have been rising unabatedly for the last few months. Experts argue that the inflationary consequences of a rise in oil prices depend on the policy response of the monetary authorities who can ameliorate the short-term impacts on output but only at the cost of higher inflation. In the short term the size and distribution of output effects from an increase in oil prices depends on the intensity of oil use in production and on the speed at which oil producers spend revenue. In the medium term, higher oil prices change the terms of trade between the organization for economic cooperation and development (OECD) and the rest of the world and hence reduce the equilibrium level of output in the OECD.

High oil prices are considered to be a very important determinant of the economy's performance across the world. On an overall basis, an increase in oil price results in a transfer of income from importing countries towards the exporting nations through a change in the terms of trade in favour of the exporting nations.

There are certain important factors on which the extent of direct effect of the price change on economy is dependant. Among these factors, the most important ones are the ratio of total costs of oil to national income, the magnitude of the dependence on oil import and the capacity of the final users in reducing the consumption level of oil and making a shift towards other alternatives.

Apart from these, the responsiveness of gas prices to oil prices, the intensity of use of gas in the economy and effect of increasing oil prices on the prices of other alternative sources of energy, electricity etc. influence the extent of the direct impact of hike in oil prices on a country's economy. The higher the level of increase in oil prices, the longer will be the period for the sustainability of higher prices and as a result it will lead to larger impact on important macroeconomic variables which are used to determine the performance of an economy.

This trend in rising prices has become a concern for the developing economies like Pakistan. Because if this trend continues it can result in inflationary pressures in the economy, increase budget deficit and balance of payment problems, and hamper the economic growth.

Mainly due to increase in prices of petroleum products, the average of July to April 2010-11 CPI, SPI and WPI increased over the same period of 2009-10 by 14.08 per cent, 18.47 per cent and 23.29 per cent respectively. Furthermore, in July to April 2010 CPI, SPI and WPI increased over same period 2008-09 by 11.49 per cent, 12.96 per cent and 11.26 per cent respectively; and in July-April, 2009 the CPI, SPI and WPI increased over 2007-08 by 22.35 per cent, 26.33 per cent and 21.44 per cent respectively. The inflation rates based on CPI, SPI and WPI in July to April 2010-11 were lower as compared to 2008-09 except WPI but were higher as compared to 2009-10.

Petroleum products maintained first position in the export group of the country during October 2010 as in the same position in the previous month.

In this month, its exports amounted to Rs6,021.09 million as against Rs6,238.12 million in September, 2010 and Rs7,438.91 million in October 2009 showing a decrease of 3.48 per cent over September 2010 and by 19.06 per cent over October 2009.

Exports of this item during July-October, 2010 of current financial year stood at Rs29,184.83 million as against exports of Rs22,666.10 million during the corresponding period of last year showing an increase of 28.76 per cent. In terms of quantity, 456,355 tons of petroleum products were exported during July-October, 2010 as against 450,403 tons exported during the corresponding period of last year showing an increase of 1.33 per cent. The main buyers of petroleum products during July-October, 2010 were Afghanistan (Rs17,431.76 million), U.A.E. (Rs8,476.87 million) and Republic of Korea (Rs1,969.67 million). These three countries accounted for 95.52 per cent of total exports of petroleum products during July - October, 2010 as against their combined share of 90.70 per cent during the same period of last year.

During the same period in the country, the petroleum group contributed 28.21 per cent of total imports in which the share of petroleum products and petroleum crude were 20.53 per cent and by 7.68 per cent respectively. During July-October, 2010, this group contributed 26.64 per cent of total imports showing a decrease of 8.58 per cent as against their combined share of 29.14 per cent during the corresponding period of last year. Imports of POL during October, 2010 valued at Rs77,500.91 million was higher by 77.47 per cent compared to Rs43,671.03 million in September 2010 and by 4.85 per cent compared to Rs73,917.15 million in October 2009. Cumulative imports of POL during the period July-October, 2010 amounted to Rs279,168.90 million as against Rs254,494.13 million during the corresponding period of last year showing an increase of 9.70 per cent. The share of POL in total imports in October 2010 was 28.22 per cent as against 18.32 per cent in September 2010 and by 29.90 per cent in October 2009. During July-October, 2010, its share was 26.65 per cent as against 29.14 per cent in the corresponding period of last year.


Oil at $113.48 a barrel unravels powerful impact across the board. However, investors should realize that, in the end, higher oil prices might be more potent in slowing economic growth than in boosting inflation. The path that oil takes from here will be important for Pakistan's economic development. The uncertainty around that path merits a wise policy response from the government.


June 2010 69.04
July 2010 67.95
Aug 2010 67.74
Sep 2010 67.26
Oct 2010 66.99
Nov 2010 72.96
Dec 2010 79.67
Jan 2011 72.96
Feb 2011 80.19
Mar 2011 76.58
April 2011 83.56
May 2011 88.41