Pakistan’s Economy and International Oil Prices

Is the rise in oil price real or government is fleecing people by raising the oil price every other day?

Pakistan is currently among the lowest performing economy in the Asian region. Pakistan’s GDP growth is being recorded as less than that of China, India, Sri Lanka and Bangladesh. It is facing multifaceted challenges at the macroeconomic level which are threatening the economic stability necessary for growth and development. The fiscal deficit is expected to touch 8 percent of the GDP at the end of the current fiscal year against 4 percent claimed by the present government. The worst economic situation is being translated into record low growth of Large Scale Manufacturing (LSM) sector, leading to a contraction in the job opportunities. One of the many reasons is the abnormal rise in oil prices in the international market. The import bill has increased so high that trade deficit has increased to more than 41% within first eight months of current fiscal year. It is pertinent that the country’s economy will pay the price of huge fiscal and trade deficits. Pakistan can adopt certain strategies to address its energy problems. One of the viable options is the early completion of pipeline from Iran, Qatar or Turkmenistan besides opting for import of Liquefied Natural Gas (LNG) to meet energy demand. It can also go for conversion of electricity plants on coal and can avoid excessive use of furnace oil for power generation. Forced or voluntary austerity campaign by the government to conserve energy and reduce oil consumption is another viable option. Government can announce twice a week petrol holiday similar to CNG’ one way of stopping public from unproductive use of oil until a substantial fall in oil prices internationally occurs. Further, it can reduce or remove the subsidies on all users of petroleum products to cut the expenditure. We can discuss these options in some other time. In this issue the main focus is on the oil prices in the international market. Is the rise real or government is fleecing people by raising the oil price every other day?

If we look at the trend in the international oil prices, one can observe a consistent rise in the petroleum products in the international market. The highjump in crude oil prices in the international market’ the U.S. benchmark is trading near a ten-month high of $107 a barrel from $75 in October ‘has sent fuel prices higher across the globe. If the recent highs are broken, the market will rise to $110, and on to the $115 level. The Energy Information Administration (EIA) shows global consumption of liquid fuels increased by 0.8M b/d in 2011. The EIA expects it to accelerate within the next 2 years to reach 89M b/d in 2012 and 90.3M b/d in 2013. The growth in consumption is not coming from OECD countries but from China, Middle East countries, Central America and South Africa ‘the biggest consumers this year. In other words, non-OECD members will account for the entire consumption growth over the next 2 years. The production of crude oil by non-OPEC members will increase by 690,000 b/d and 750,000 b/d in 2012 and 2013 correspondingly. North America will show the biggest growth’ 360,000 b/d. Brazil will increase its oil production by 120,000 b/d. China and Columbia will do the same while Russia and Mexico will see their oil production declining a little. The EIA anticipates much higher oil prices in 2012 as opposed to the previous forecast. For example, the forecast shows an increase from $100/b to $106/b in 2012.

The geopolitical reason is the main cause of this appreciation which changed drastically and drove the oil prices to rise. The political turmoil and civil war in Libya caused disruption in the oil supply to international market since February 2011. A number of oil companies announced decline in their production till December 2011. The Libyan oil supplies are returning to the global market as the situation is normalizing there. The problem is, however, far from over as disruption in oil supplies from many important countries such as Iran, Syria, South Sudan, and Yemen is influencing the market since January 2012. Yemen used to produce and export 260,000 b/d which dropped significantly. The production, according to the EIA, will reach 180,000 b/d in 2012 and 200,000 b/d in 2013 which is still lower than the pre-crisis production.

The civil conflict is significantly affecting the oil production. There is no solution in sight of the conflict between Sudan and South Sudan on the transit tariff due to which South Sudan has suspended 90% of its oil production in late January 2012. The estimates of the EIA show the decline of crude oil production in Sudan and South Sudan by 200, 000 barrel per day (b/d) in 2012. The production is not expected to recover in the current year, however, it can increase to 370, 000 b/d in 2013. The Syrian situation is also worsening with every passing day. The problems intensified after the rebels damaged the main pipeline. As per the EIA estimates, the Syria’s oil production declined to260, 000 b/d and will continue to decline in 2012. If situation improves, the oil industry is expected to recover next year and the production can reach to 360,000 b/d. These events have considerable impact on the global market of crude oil which is reflected in the rise of oil prices in the global market. The tensions with Iran of the US and European countries are also threatening the oil prices globally.

Last year’s crude oil stocks of the Organization for Economic Co-operation and Development (OECD) were equal to2.64B barrels by the estimates of EIA. If the situation in the oil producing regions persists, by late 2013 these stocks will decline down to 2.57B barrels. To deal with the situation OPEC members will have to increase their oil production by 490,000 b/d in 2012 and 560,000 b/d in 2013.

The latest EIA’s report released on March 6th suggests that an increase in the global consumption of crude oil will determine the production growth in non-OPEC countries. The global consumption of liquid fuels will reach 1.1M b/d in 2012 and 1.4M b/d in 2013. The supply from non-OPEC countries will increase by 0.7M b/d in 2012 and 0.8M b/d in 2013. In order to satisfy the global demand, the global market of crude oil will rely on the OPEC.

Many analysts believe that the increase in oil prices in the short-term will be due to the tensions in the Middle Eastern region and the Greek bond swap. The mid-term perspective, however, show fall in the oil prices due to Russia and OPEC’s record-high oil production and supplies from Libya. Moreover, the China’s economic slowdown will also contribute in the fall of oil prices.

The oil markets will continue to have a bid in them though, as the Middle East, and Iran in particular, will continue to offer plenty of reasons to have oil rise in value. The standoff between Iran and the West continues to go nowhere, and there is concern that the Israelis will launch an attack on the Iranians, flaring tensions. Iran has threatened to block the Strait of Hormuz if attacked, but in reality this would only cause a very short-term spike in price as the US Navy will open the passage in short order if closed.