Analysis: The government is not to blame for rising petrol prices

International commodity markets do not obey governments; they follow laws of supply and demand.


Farooq Tirmizi April 01, 2012

KARACHI:


President Asif Ali Zardari is not a particularly well-liked politician, and indeed, his record on economic policymaking leaves much to be desired. But he is not in the least bit responsible for the spike in oil prices and has absolutely no control over them.


So while complaining about rising petrol prices is reasonable, blaming it all on the president is irrational. Indeed, it can be argued that the government of Pakistan, since President Zardari’s inauguration has held prices at levels far below what would have been justified according to international increases.

Since the day President Zardari took office to this past Friday, international oil prices – as measured by Brent crude futures trading in London – have risen 26.6% in US dollars. The rupee, meanwhile, has depreciated by 18.7%, meaning that the collective increase in the price of petrol in Pakistani rupees should have come to 50.3%. Yet even if the so-called massive hike in petrol prices goes through, the rupee price of oil will have increased only 21.9% from the Rs86.66 it was in September 2008 to the Rs105.68 it is expected to be from April 1, 2012.

Hence, all of the so-called journalists on television screaming bloody murder about “petrol bombs going off” – a highly insensitive metaphor in a country wracked by terrorism – can stop with polemics. Petrol prices in Pakistan are actually lower than they should be. The public should be grateful that the price is not Rs130.27 per litre of petrol, which it rightfully should have been.

Simply put, the government is at the very end of what it can reasonably do in response to rising oil prices which is to cut taxes on oil. Given the fact that well over 97% of Pakistanis pay no income tax, it is unreasonable to expect the government to cut those taxes to zero. The government must get its revenues from somewhere, and taxing a major source of pollution is as good a place as any.

And in any case, even if the government were to continue cutting those taxes to zero, it would have absolutely no power whatsoever to bring down the price of oil, since no government in the world – not even the US and Chinese governments put together – can control a commodity that is bought and sold on a truly global scale. There is only one law oil prices obey: that of supply and demand.

On the demand side, Brazil, China, India and many other emerging economies have an insatiable appetite for energy that continues to grow apace, putting enormous strain on global suppliers. On the supply side, no major suppliers have come online and Saudi Arabia remains the only country in the world with any meaningful spare production capacity.

It does not help that Saudi domestic consumption has jumped by about 67% over the past decade, despite only a 37% rise in population. The Saudis – the world’s only reserve producers of oil – are now consuming about a quarter of their own oil.

Knocking Iran off the global list of oil suppliers – through sanctions and other restrictions on the country’s oil industry – also have the effect of constricting the availability of oil at a time when consumption levels are skyrocketing.

In this context, Pakistan is little more than a bystander. Less than 15% of the oil consumed in Pakistan is produced domestically, according to experts in the energy industry. The vast majority of it is imported from other countries. Pakistanis may have a lower purchasing power than Americans or Europeans, but we buy our oil from the same market and hence must pay the same price. It may hurt, but it is not our government’s fault.

Published in The Express Tribune, April 1st, 2012.

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COMMENTS (33)

JB | 9 years ago | Reply

A very one sided one-dimensional article. No matter what the government argues, the blame still falls on them. Prices never decrease when the global prices decreased. Income tax is not paid by our 'elected' officials. Tax is deducted from our salaries at source. So, I know I pay my taxes. You can bring out every possible angle, but there is no way you can justify the insane and inhuman increases in prices. We might as well bring out our cycles instead of our cars!

Pakistani | 9 years ago | Reply Fully support the hike in petrol price. Humble request to make it Rs 200 per liter for petrol on May 1 (to really crush the people and send a message). The government needs money to pay for plane full of freeloaders' endless picnics to Tajikistan, South Korea, China (and wherever the host government is willing to tolerate them). Not to mention all those sarkari Umras and Haj. It is the civic duty of the awam to support their government and we must do it cheerfully. Squeeze out the last drop of blood from us awam before we drop dead.
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