Feb 6 - 12, 20

Continuous increase in oil price has raised serious concerns among the policy makers in Pakistan, because of its adverse impacts on the national economy by creating inflationary pressures in the economy, slowdown in the economic growth, increasing budget deficit, and balance of payment problems.

With imported oil being the second largest source of energy, Pakistan is heavily dependent on the oil imports from the Middle East countries in particular Saudi Arab.

As per Energy Year Book, almost 80 per cent of the demand for petroleum products in the country is met through imports.

According to Oil and Gas Journal (OGJ), Pakistan had proven oil reserves of approximately 400 million barrels. Majority of produced oil comes from proven reserves located in Balochistan. Pakistan's total energy consumption stood at 63.1 million tons of oil equivalent in 2009-10. During the period 2001-02 to 2010-11, the consumption of petroleum products has increased by an average of 1.5 percent per annum.

As per the Economic Survey of Pakistan 2010-11, the balance recoverable reserves of crude oil in the country have been estimated at 280.647 million barrels. The average crude oil production per day has increased to 65,996.50 barrels in 2011 from 65245.69 barrels per day during the same period last year. The overall production has increased to 18.08 million barrels during 2011 from 17.88 million barrels during the corresponding period last year showing an increase of 1.15 percent.

Since the initiation of industrialization in the country, crude oil and its prices has become a key indicator of economic activity.

Pakistan is heavily dependent on the imported oil, which is one of the biggest sources of energy. Energy demand and supply has increased dramatically in the country despite various ups and downs in the economic development and growth. At the moment, crude oil is the major component of energy requirement and cannot be avoided.

At the same time, high imports of crude oil and petroleum products affect the balance of payments adversely. Pakistan produces less oil than its requirement therefore it has to import oil from other countries. The country generates almost 40 percent of its energy from thermal resources that is very expensive; hence the increase in oil prices increases the electricity prices and also increases the size of the circular debt.

The country produces much expensive energy, which increases the cost of production and also affects other macroeconomic variables of the economy. As oil prices have a negative correlation to export earning and it also affects export earnings adversely. Pakistan in the past had crucial sensitivity to higher oil prices and the SBP estimated that a $10 hike in crude oil prices could cause deterioration of 0.5 percent of GDP in the current account.

The 1970's shock of oil price took attention of many economists to consider oil price as an important macroeconomic factor that influences the overall economic activity.

There are no two opinions that economic development of a country is directly correlated with the oil price volatility. The rapid and large oil price rise experienced recently has created a widespread concern about its impact on the country's economy and on poor households.

The economy is over dependent on the imported oil that a change in its prices causes an impact almost in all the sectors of the economy. If energy becomes costlier, the cost of production will go up adversely impacting both domestic consumers and exporters whose products could be rendered even less competitive than they are at present.

Due to higher cost of production, Pakistan's goods are already more expensive than other countries and with the continuous increase in cost of production, it appears that going forward exports will be hit unless government takes serious measures to control expensive energy and switch over to cheap energy. But, in an extremely competitive market where orders are awarded on a difference of cents only such continuous increase in cost of production is alarming.

Import of petroleum group grew by almost 10 percent during calendar year 2011 mainly reflecting the impact of spike in international oil prices.

In addition to that, quantity import of crude oil has also increased by 14 percent in calendar year 2011.

Pakistan generally imports Arab light crude to take advantage of the proximity impact. The oil sector has a considerable impact on the economy as the sector attracts by far one of the highest levels of foreign direct investments in the country and also raises significant revenues for the government.

Government has completely removed the subsidies on the petrol products rather they are making money on the petrol prices.

The indirect effects of oil product price is the most difficult to calculate. Households, which are consumers of certain petroleum products (kerosene, LGP and gasoline) and who also purchase other goods whose costs are impacted by oil product prices (diesel for transportation) feel the effect of higher oil prices in their household expenditure though the government controls the product prices and does not let them rise by allowing subsidies.

According to an estimate, low-income deciles are more severely affected than higher income groups and resultantly there emerges an increase in the cost of living of general people.

Studies also confirm the picture that the rural poor suffer the most, primarily because of the importance of kerosene for these households. Small and medium sized enterprises are also likely to suffer from higher fuel costs.

In order to improve economic condition of the country and bring back it on track, it is important for Pakistan to search alternate energy resources instead of importing crude oil. The trade deficit increases every time oil prices increase. Higher oil prices essentially burn wealth. Much of the crude oil is turned into diesel and gasoline, which is then in turn literally burned. While energy is important, the more expensive it is, the more it costs us. Higher crude oil prices inevitably lead to higher prices across the board, leading to a higher inflation rate. This leads to the poor and middle class being hit severely hard. This means there is less money to spend on other products and services, and less money for savings, which means less money for investments.

Higher oil prices are harmful. In order to curtail the downside effects of this issue the government should do not plunge into short-term remedies such as raising prices abnormally to mitigate the upcoming risks. The government needs to look at the whole issue in its entirety rather than exercising easy options to pass on the burden of oil price to the consumer or accumulate debts to pay oil marketing companies.