Plum­met­ing oil prices and Pak­istan

The Pak Banker - - 4EDITORIAL - Huzaifa Akhtar

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.

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