Heavy reliance on petroleum products leads to crisis

Higher oil prices caused increase in circular debt, reduced investment-related imports

LAHORE: Pakistan’s economy is heavily dependent on oil as it is a net importer of petroleum products.

Crude oil and petroleum products play a significant role because of their widespread use in the economy. Around 80% of the total oil requirement is met through imports.



When international oil prices, on average, were $80 per barrel, the annual import bill was around $15-16 billion, consuming 35-40% of the total imports. Now, the import bill stands around $10-11 billion based on an average price of $55 per barrel.

If history is any guide, the electricity generation had been mainly done through hydro means in Pakistan since its inception.

In the late 1980s, there was a lack of political consensus to generate electricity by hydro means as Kalabagh Dam became a thorny issue. In the absence of any hydro source, load-shedding gradually started to increase. Then the government took a strategic decision to generate electricity through furnace oil.

During the decade of 1990s, the international crude oil prices remained range bound between $20 and $30. Those lower prices did not pose any problem as far as electricity generation was concerned at that time.

However, the strategic decision enormously increased the dependence of Pakistan on petroleum products over the years. As a result, electricity production through oil reached 32%.

Then came the decade of 2000 and with a rising trend for crude oil prices, the government could not increase electricity tariffs accordingly due to political and socio-economic reasons. Owing to a lack of adjustment in electricity prices, the problem of circular debt surfaced in the energy supply chain in 2006.

The resurfacing of circular debt became a recurrent issue since then. The higher the international oil prices, the higher would be the pace of accumulation of circular debt. The government could not adjust the prices since there are unintended consequences associated with it.

The decline in international crude oil prices slowed down the accumulation of circular debt in the recent past, which is being trumpeted. There is a slight improvement in bills recovery; however, the situation is being exaggerated.

Apart from the circular debt, the import bill of petroleum products resulting from higher international oil prices gobbled up most of the share of imports from 2008 to 2014.

Under those circumstances, the investment-related imports declined sharply since focus remained on necessities and consumption. The lack of investment-related imports reduced the productive potential of the economy.

Similarly, petroleum products are used up in the transport sector. The higher international oil prices increase the fuel cost content a great deal, leading to increase in transportation cost, which ultimately fuels the food and energy content of consumer basket.

In other words, higher crude oil prices translate into food and energy inflation.

The agriculture sector heavily depends on petroleum products. The government used to subsidise the farmers to protect them from higher oil prices.

Since 2008, the government has curtailed subsidies for the farming community to arrest the growing fiscal deficit. The curtailment contributed heavily to the costs of farming community, which made food expensive from 2008 to 2014.



In short, the agriculture, industrial and transportation sectors depend on the petroleum products in every economy. However, the case of Pakistan is instructive where electricity generation also heavily depends on petroleum products.

The heavy dependence on petroleum products creates shortages at different intervals and leads to crises. Such crises entail huge political cost. Last but not the least, crisis management would remain significant for the policymakers in the years to come.

The writer is Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)

Published in The Express Tribune, April 10^th, 2017.

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