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The influence of oil prices on Pakistan’s economy

Published on 23th Nov, Edition 47, 2015

 

During early 1990s in Pakistan, power and transport industry were the key consumers of petroleum/oil having share of 25 percent and 50 percent, respectively in its total consumption.

The crude oil prices have shown a record rise in the last few years rendering the oil importing and developing countries to face the serious fall out and economic setbacks.

Experts have revealed that the consumption of petroleum/oil has explained an important fall in period between FY2000-01 and FY2005-06. The cause was increase in the price of crude oil since 2001. From an average price of US$22.99/barrel during 2001, it was raised to US$50.04/barrel now, which was 118 percent higher than 2001.

Pakistan is an oil importer country and any decrease in international oil prices will have positive impact on our import bill and country’s balance of payment position. One major impact of decreasing oil will be reflected in CPI inflation for month of November and December. We may see a great decline in CPI number during these two months.

High oil prices in the international market in the past had forced Pakistan to borrow from the multilateral financial institutions and other lenders to maintain a reasonable level of foreign exchange reserves and keep the flow of imports uninterrupted. The recent decline in oil prices is expected to reduce the oil import bill significantly. Low oil prices are also expected to revive industrial growth and promote economic activity.

The Government of Pakistan altered the guaranteed return formula of the refineries to IPP (Import Parity Price) formula. Formerly, the refineries were working under a fixed return formula where the return was capped in the range of 10 to 40 percent of their equity. Under the new formula, an import tariff is applied to the FOB price of the petroleum commodity to examine the ex-refinery rates. Further to attract on the exploitation of indigenous resources, the government proclaimed policy for Power Generation Projects 2002 in which One Window facility was provided by PPIB for all projects above 50MW capacity.

However because of gas load management, share of oil has again started growing. But still oil stayed expensive prior to July 2014, as the government immediately responded to declining foreign oil rates and brought the local oil rates to Rs67.79/liter less than the levels last seen in 2009. Due to substantial decline in retail prices on Dec 1, 2014 and afterwards on Jan 1, 2015, sales of petrol recorded unprecedented rise.

However, unluckily, PARCO experienced a shutdown because of tripping of 11KV lines in Muzaffargarh region while NRL also experienced shutdown because of leakage of distillation tower. The short supplies aggravated the problems for OMCs (Oil Marketing Companies). On the other hand as required by the provisions of OGRA Ordinance, OMCs had to sustain 20 days storage/stocks which OMCs couldn’t fulfilled.

 

Furthermore, in the first half of Jan 2015, 2 vessels of OMCs were delayed. By the time daily sales recorded the level of 15,000 metric tonnes/day thus 45,000 metric tonnes greater than the normal demand during first fortnight of Jan 2015, lead to severe pressure on reserve level.

An unfortunate coincidence of all these factors contributed to the petrol shortfalls. More recently, there is a shortage of HOBC across Pakistan presently as only one oil refinery, PARCO, is generating this high quality fuel, but its supply is limited to 3,500 metric tonnes only, while its demand reached at 4,092 mts in Sep 2015.

It is predicted that during November, the demand could go up to 4,500 mts. In Karachi, the HOBC is only obtainable in posh regions. In view of the demand and the profit potential, OMCs have shown willingness to import the product to meet demand. This fuel is being generated through PARCO only and it can generate only a limited amount.

There was no shortage of Hi-Octane fuel in Lahore. There is production constraint almost HOBC as the refinery has limited output. This is not a present shortage but an overall demand-supply imbalance. Price differential varies and at the moment the difference between price of Super petrol and HOBC is about Rs3. In November 2015, the retail price of HOBC is Rs79.79/l, while super petrol is being sold at Rs76.26/l.

The Shell company sold only 1,200 mts of HOBC in Sept 2015 while PSO sold 2,145 mts HOBC in Pakistan in the same period. PSO sales of HOBC have grown by almost 250 percent since last year mainly because of the falling HOBC rates. However, supply of the product has not stayed at par with the market demand as PARCO does not have the production capacity to meet the total market demand. This means that the extra product would have to be imported to meet the needs of the market.

PETROLEUM PRICES IN PAKISTAN (RS/LTR)
PRODUCT RETAIL PRICE
HOBC 79.79
Premium 76.26
High Speed Diesel 83.79
Light Speed Diesel 53.59
Kerosene Oil 57.11
PER BARRELS OIL PRICES (US $)
Sep 44.83
Oct 45.02
Nov 41.39
OPEC’s role

It had been broadly approved that a bitter oil production war was being won through Organization of the Petroleum Exporting Countries (OPEC) cartel, which has flooded the market in a move designed to drive out the upstart US shale industry by keeping rates low.

US oil production reached at 9.6 million barrels a day earlier 2015, but has not declined dramatically. It now stands at around 9.1 million barrels and is predicted to drop to 8.8 million in 2016, with 4 million coming from shale. The cost of OPEC’s strategy has been months of painfully low worldwide oil prices. In fact, OPEC’s own rates have hit 6-year lows. The daily basket price fell to $39.21 a barrel on Nov 13.

It is also recorded that present prices are below the levels needed to balance the government budgets in most of the OPEC member states. Nigeria and Venezuela in particular are thought to be on the brink of bankruptcy and even Saudi Arabia has been draining its international reserves to the lowest level in two-year.

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