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Falling oil prices: who are the true beneficiaries?

Published on 28th Sep, Edition 39, 2015

 

Oil price in the international market has slumped from around $100 per barrel to below $45 in the past one year. But in Pakistan, the governments generally do not provide the genuine relief to the masses after only reducing fuel prices marginally in the domestic market. A common man will only become the beneficiary of falling oil prices in the global market if the government and the oil and gas companies pass on the benefit fully and honestly to the consumers in Pakistan. Unfortunately it is not practiced generally in the country.

Petroleum products make up nearly a third of Pakistan’s imports. The petroleum prices are revised on every month by the government and petroleum prices are suggested by the OGRA (Oil & Gas Regulatory Authority of Pakistan) on every end of the month to decide new petroleum products prices for the next month and onwards. Petroleum products monthly price revisions are proposed by the OGRA to the Ministry of Petroleum. This month, the government cut the price of petrol by Rs3 per litre from Rs76.76 to Rs73.76 per litre, diesel’s by Rs3.01 from Rs85.05 to Rs82.04, HOBC’s by Rs3 per litre from Rs82.79 per litre to Rs79.79 per litre, kerosene oil’s Rs3 per litre from Rs60.11 to Rs57.11 and Light Diesel Oil (LDO’s) Rs3 per litre from Rs56.59 to Rs53.59 per litre.

Game behind

Oil prices continue to fall on oversupply concerns in the international market, which is currently under pressure and in a state of volatility. Unfortunately, people are still hardest hit by soaring commodity prices. It is worth mentioning that Pakistan has a cost-push inflation. It depends upon fuel prices. It goes up and down with the rise and fall of fuel prices globally. Realistically speaking, the government’s decision to cut or raise petroleum prices actually determines the change in the inflation rate. The fuel price hike raises the transportation costs, which increase the commodity prices. There seems hardly any connection of inflation with the interest rate because high interest rate has been unable to control double-digit inflation in Pakistan.

It is actually not the economics but the politics that really matters in driving the commodity prices up and down. The country’s Consumer Price Index (CPI) inflation dropped to 3.96% in November 2014 for the first time in the last 11 years. It was even lower than the government’s estimated figure at around 5.5%. At that time, the government led by Prime Minister Nawaz Sharif could not afford to take unpopular decision of fuel price hike in wake of anti-government protests across the country. Hence, the government in a move to relieve the masses decreased the prices of petroleum products at least two times in less than two-month period. It is actually the political decisions that determine the increase or decrease in inflation rate in the country. If the government fully transfers the benefit of reduction of price on POL products to the people, the inflation rate will decline and ultimately improve the purchasing power of a common man. This will also reduce the cost of energy, which will help the government to control over the present energy crises in the country.

 

Deflation fears

The Consumer Price Index (CPI) had been falling for the last seven months, but it dipped to 1.7 percent in July and August triggering fears of deflation. Experts believe that the lower inflation in Pakistan is mainly due to falling crude oil price in the global market. On the other hand, the country’s exports have been consistency falling due to plunge in global commodity prices, rigidity in the exchange rate and heavy domestic taxation. The government has done nothing except reducing fuel prices to tame the inflation to current level. The general masses will get the benefit if the government had adjusted power rates according to decline in fuel prices. On the contrary, it increased the gas rates. Some others contend that the current situation is suitable to push the economy by lowering interest rates on long term bank loans specifically for up-gradation of technology. The right kind of deflation involves lower prices through increased productivity and better technology.

The central bank has cut interest rate to over four-decade low of 7% in order to support growth and keep the outlook for future inflation consistent with the target. The lower interest rate has, however, not helped because the government remained the largest borrower due to its inability to increase tax revenues. The prolonged periods of deflation can lead the country to economic stagnation and high unemployment. The government will have to take a calculated risk to bring the inflation to a reasonable level through monetary policy and increased development spending.

Blow to local companies

It is due to the significant fall in oil prices in the global market that Pakistan International Airline (PIA), the national carrier earned an operating profit of Rs2.8 billion for the first time in the last five years. PIA, however, did not reduce its fares of domestic flights to pass on the benefit to the people.

On the other hand, the net profit of Pakistan State Oil (PSO) dropped 68% to Rs6.9 billion for fiscal 2014-15, down from the previous year’s Rs21.8 billion due to the fall in price of crude oil. Profitability was affected by sharp decline of 46 pr cent in the OPEC basket price of crude oil, which came down to $59 per barrel in June 2015 from $109 per barrel in July 2014. The PSO has lost market share to private firms in the petrol and diesel categories as the government has refocused its attention to import of furnace oil, which is used to run thermal power plants.

Pakistan’s largest petroleum producer Oil and Gas Development Company Limited (OGDCL) witnessed an erosion of 29.58 per cent from the annual profit due to falling crude oil price in the global market. The company recently announced that its net profit came down to Rs87 billion in fiscal 2015 from Rs123.9 billion it made a year before. As a petroleum producer, a company is closely linked with international crude oil price. The falling oil price also had consequent impact on the royalties the company pays to the government. Royalty was down 20 per cent to Rs23.7 billion, indicating the shortfall that government might see in its income sale of natural resources.

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