Plummeting oil prices and Pakistan
WITH the dramatic world oil price slump that began in June 2015, all net importers seemingly rejoiced at the outset. The end of the year saw oil prices plummet and experts likened events to past historical oil shocks. Exporters lost billions of dollars while importers gained. But what does the sustained decrease in world prices really mean for Pakistan, a country where petroleum amounted to twenty percent of total imports in 2015, and where such oil imports are essential to the working of the economy?
The Middle East might be experiencing a rerun of the 1980s glut; with the OPEC once again under strain as more oil is produced than the world demands. Who will cut extraction rates first? Is the OPEC in for a downfall? While these questions plague the international economy, no one has a sure answer. Quite recently, the oil market was in a frenzy to raise prices after hearing hushed rumors about a possible future output cut by Middle Eastern producers. Although this means the world in general gains from the cheaper fossil fuel, one can't do much but wonder how a struggling country like Pakistan is affected in the present.
How persistent are these low prices? Importers would hope that they remain low for a while. Demand for oil is low in the world, raising concerns among economists about an imminent world recession. Market forces determine oil production, and consistently high demand from China, the budding superpower, has influenced a lot of the world's supply of oil. The Chinese economy however is now slowing down, and oil demand is not likely to increase at the same rate as predicted. Many players are trying to hold the reigns in the world oil market, yet no winner is in sight. Tensions in the Middle East regarding extraction rates have inspired low confidence of traders in oil futures, derailing the market mechanism and delaying the eventual increase in oil prices. Saudi Arabia is far from interested in cutting production, perhaps giving preference to debilitating its oil competitor Iran's export earnings over gains at home from possibly higher prices. Other OPEC members are hesitant to change production, waiting for Saudi to make the first move.
For Pakistan, plummeting oil prices look like a much needed opportunity for economic prosperity. The Oil and Gas Regulatory Authority (OGRA) is expected to issue revised and lower prices for the coming month of March, reflecting world market changes. With previous price reductions welcomed by consumers, a trip to the petrol station is less expensive for the average spender, for the time being. With more money left over to spend, the rational Pakistani consumer would do well to increase savings, rather than raising expenditure on consumer goods. Although this may sound counter intuitive, a shift in current saving patterns can help consumers bounce back from the very likely future price increase. This would help consumers in the long run and stabilize spending. Even if this is not the case, higher current spending on consumer goods can also work to stimulate current production in the economy, making it possible for certain groups to benefit.
The economy has found itself in luck, with lower import pressures on the rupee, cheaper energy production and maybe even lower inflation rates. Even with lower tax revenues from the import of oil, the government gains more than it loses. Thirty five percent of total energy production in Pakistan is through the use of oil. With prices consistently falling, energy produc- tion is cheaper for the authorities. The future looks anything but bleak and the bustling Pakistani economy riddled with its plethora of problems, heaves a sigh of relief. With most goods within the country transported out over land routes, this means a significant cost reduction for businesses.
A source of discontent among consumers, however, is the tax policy of the government. Expecting policymakers to pass on the benefit of cheaper oil to the consumer is not irrational. With its benefits to Pakistan, cheaper oil can fuel economic betterment for as long as prices remain low. With insufficient tax revenues generated from within the country, the government looks towards import duties to meet its revenue targets. Although extremely unfair to domestic consumers, the benefit to fiscal authorities is motivation enough to raise import taxes on oil imports to any extent necessary. This may do more harm than good to the economy, as pumping cheaper oil into the country can generate revenues, employment and improve general welfare.
Although the reduction in prices may be a welcome respite, oil prices have always shot back up after gluts as in 1980, and there are no visible mechanisms in place to prevent this from happening again. As prices for fossil fuels decrease, more often than not they tend to shoot back up to original, possibly even higher rates. A forward-looking government and consumer must see that what has become an affordable commodity might again be far out of reach with time. The best course of action in the present is for the country to take advantage of cheaper oil, till prices rise again. A period of economic revival, no matter how short, could be fully realized if the government takes a more lenient stance on duties imposed on petroleum imports.