INCREASING OIL PRICES THREATENING ECONOMIC STABILITY

OIL IMPORT BILL WILL CROSS $15BN THIS YEAR.

AMANULLAH BASHAR
(feedback@pgeconomist.com)
July 25 - 31, 20
11

The unruly global oil prices are posing a serious threat to Pakistan that sees lethargic development of its abundant alternative energy resources.

As a result of heavy reliance on costly oil imports for power generation and transportation, the overall import bills are likely to reach $44 billion during current financial year 2012.

Although the oil prices may not be allowed to increase in the coming month of Ramadan to check the rising inflation, the oil prices are sure to go up post Ramadan, which may add to inflationary pressures in the first half of the current financial year.

In fact, the untamed inflation and depressed rupee/dollar parity are also feared to increase average oil prices and above all to up oil import bill to the tune of $15.3 billion in the current financial year 2011-12.

According to the financial analysts, US$10/bbl increase in average oil price for the current year pushed up oil import bill by 10.5 per cent i.e. US$1.5billion as compared to $13.8 billion in previous financial year 2011.

Assuming on the basis of new forecast, the oil import could go up by 27 per cent year on year (YoY) this year which would bring the overall import bill up by nine per cent YoY to US$44billion.

Analysts are of the view that the lagged impact of high oil price in fourth quarter of financial year 2011 that is estimated on the basis of US$113/bbl is expected to follow in the first quarter of the current financial year.

As a matter of fact, the higher oil import estimate presents additional two per cent upside risk to exchange rate assumption of 2.7 per cent depreciation, however the estimated decline in oil prices beyond first quarter of financial year 2012 is likely to ease out pressure on rupee-dollar parity.

Since global oil demand is expected to ease in the first half of the financial year 2012 which might get a boost in the second half of the financial year, the oil prices are expected to follow a similar course. In this respect, the analysts expect that the inflationary pressure would also soften in the second half of the year after Ramadan season.

However, in the current scenario the consumer price is likely to up by 12 per cent to 12.4 per cent due to direct impact of fuel price especially increase in petrol, diesel and kerosene prices affecting public transport charges, air and train fare, and power tariff.

DEVELOPING GAS RESOURCES

Pakistan is said to have enormous energy resources especially undeveloped natural gas resources as well as huge coal deposits. Today, the industries are facing acute gas shortage especially in Punjab adversely affecting the industrial outputs. The CNG stations and industries are unable to operate throughout the week as a result of gas rationing. The situation calls for development of gas resources on war footing before it is too late.

Amid the disastrous energy shortage, the assurance held out by Dr Mubarakmand who is working for conversion of Thar coal gas into gas for power generation is of course a silver lining for the energy deficient country. However, the decision makers are surprisingly not so responsive to such energy plans, which are a matter of serious concern.

According to Mubarakmand, the Thar coal project if carried out successfully would encourage investment by leading international companies dealing with development of underground coal. According to him, several companies had shown interest in the project of Thar coal gasification.

The first phase of this vital project would require $105 million for opening a letter of credit for the import of machinery and equipment.

It may be recalled that the government had approved two projects including creation of new processing facilities for production of coal gas by underground coal gasification and another was creation of new processing facilities for handing and purification of the gas in April 2009. Total cost of these two important projects was estimated at Rs404.45 million and Rs490.48 million respectively. There is a good news that the work on the projects is in progress and the first 50MW gasifier had been completed.

However, it exposes the lack of interest of the policymakers that no fund was allocated during the last financial year. Only a fund Rs5 million was allocated against a demand of Rs5,703 million.

It may be mentioned that the total cost of the project is estimated at Rs8,898.7 million, with a foreign exchange component of Rs5,847.3 million, which was formally approved by the Executive Committee of National Economic Council last year.

However, in the latest development, the ministry of finance has accepted the demand of Rs900 million for import of machinery and equipment keeping in view project's importance and financial viability. The approval of Rs900 million is meant for development of Thar coal gasification project, which has been initially designed to generate 100MW of electricity.

SIGNIFICANCE OF THAR COAL PROJECT

The energy crisis persisting in the country calls for concerted efforts by the decision makers to ensure success of the gasification project at Thar coalfield as the success of this project means a lot to the economic stability and prosperity of the people of this country. It is the unbearable cost of fuel, which has created a number of problems like abnormal increase in electricity tariffs, unmanageable circular debt, power shortage, double-digit inflation and adversely affected economic growth of 2.3 per cent during the previous fiscal year.