Crude price rally may pose threat to businesses, economy

A $10-per-barrel rise in oil prices increases import bill by $1.25 to $1.5 billion per year


Salman Siddiqui May 16, 2016
A $10-per-barrel rise in oil prices increases import bill by $1.25 to $1.5 billion per year. PHOTO: FILE

KARACHI: The recent rally in international crude oil prices to $48 per barrel from below $30 in December last year is a wake-up call for Pakistan as the rebound may pose a serious threat to businesses, industries and the overall economy.

“Every $10 [per barrel] rise in international oil prices increases Pakistan’s import bill by $1.25 to $1.5 billion per year,” said Muzammil Aslam, Economist at Invest and Finance Securities.

According to him, the tumultuous journey of crude oil prices has not ended and a further increase can be expected. “The anticipated rise will add to the pressure on foreign exchange reserves. This may prompt authorities to increase electricity tariff in the name of fuel price adjustment.”

He, however, was of the view that in the short run the crude price would recede to $39-40 per barrel with the restoration of 1.5-million-barrel-per-day oil supply in Canada. The oil flow had been disrupted by a recent wildfire in Canada’s western province of Alberta.

Aslam expected the price to hover between $40 and 45 per barrel by December 2016, which would still be higher than $30 in December 2015.

A steep decline in shale gas production and closure of many rigs in the US had aided the surge in oil prices. Economists Dr Ashfaque Hasan Khan and Dr Salman Shah pointed out that the current crude price was way short of the more than $100-per-barrel rate hit a couple of years ago.

“Why are you comparing $30 per barrel with $46-47, why don’t you compare current prices with $112 … the government has still time to take corrective measures to take benefit of the still low oil prices,” Khan said.

He was of the view that crude prices would go above $100 per barrel again in the years 2017 and 2018. The prices would rise when production from countries that were not members of the Organisation of Petroleum Exporting Countries (OPEC) would decline and the glut was removed.

He believes the government would not fully pass the impact of increase in international prices on to end-consumers. “There is no connection between prices at world and local levels … the government has not passed the recent decline in prices on to consumers. Instead, it increased the rate of taxes on local petroleum products.”

Shah still found the current price stable for the economy. The government should demand higher production from oil-based power projects keeping in view the comparatively low prices, he said.

The price rebound would help oil and gas exploration and production companies improve their earnings. Besides, it would also help stabilise the Pakistan bourse where oil stocks have a heavy weightage. The recent recovery should also help stabilise prices of other commodities like wheat, cotton and sugar.

Published in The Express Tribune, May 17th, 2016.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.

COMMENTS (3)

Basit | 5 years ago | Reply The current IMF program is going to be ended soon so that they can splurge on pre-election populist measures in 2017. By the time the election is over we'll have a fresh BoP crisis due to rising oil prices and we'll go back under a fresh IMF program. It seems we go under a new IMF program every 5-6 years or so. @Parvez: It has gone towards preventing a sovereign default. That's where it has gone. Perhaps you didn't realize how dire the situation was?
Fuzail Zubaid Ahmad | 5 years ago | Reply @Parvez, nice question. I am afraid you will ask the same question when our "corrupt" leaders will be replaced by "clean" people. So please, save your question.
VIEW MORE COMMENTS
Replying to X

Comments are moderated and generally will be posted if they are on-topic and not abusive.

For more information, please see our Comments FAQ

E-Publications

Most Read