STATEBANKOFPAKISTAN

FuelPriceTrends
AnAnalyticalReview

TeamMembers
Mr.RizwanPesnani
Director(IHFD)
Dr.MuhammadSaleem
JointDirector(IHFD)
Ms.SabbahRahooja
RegulatingOfficer(IHFD)

FuelPriceTrends:AnAnalyticalReview

Contents

INTRODUCTION............................................................................................................................................. 3
TRENDANALYSIS ........................................................................................................................................... 4
IMPACTONECONOMY ................................................................................................................................. 6
CONCLUSION............................................................................................................................................... 10

FuelPriceTrends:AnAnalyticalReview

INTRODUCTION

Thehighdegreeofdependenceonoilproducingcountriesandanyirregularitiesinpricesandsupplies
has a pervasive effect for an economy that imports crude oil to cater to its often fragile industry.
Followingthesharpsurgeinoilpricessince2003,developingcountriesthatrelyheavilyonoilimports,
arenowfacedwithanincreasedthreattomacroeconomicinstabilities,withPakistanasnoexception.
Thisbriefnoteprovidesanoverviewofinternationaloilpricetrendswitnessedsince2002.Observations
arealsomadeonhowdomesticfurnaceandhighspeeddieseloilpricetrendsmoveinconsonancewith
theinternationaloilprices.Theneedtofocusonfurnaceoilandhighspeeddieseloilpricestrendsarises
from the fact that of the total production by oil refineries of major components of crude oil, diesel
constitutes the highest share of 31% with furnace oil comprising the second largest share of 29.4% in
Pakistan(200607estimates).1
This study will then focus on how this increasing trend in international and subsequently domestic
furnace and high speed diesel oil prices, translate into creating imbalances in the economy by
exacerbating the balance of payment crises, worsening current account deficit, soaring inflation and
impacting the rates of other commodities and input prices. Consequently, the dire need of exploring
alternateandindigenousenergypotentialperhapshasneverbeenmorepressing.

PakistanEnergyYearbook2007

FuelPriceTrends:AnAnalyticalReview

TRENDANALYSIS

InternationalOilPrices
Theglobaleconomyhasfounditselfinthemidstofanalltimeoilpricepeakwhichhasalsosurpassed
thepeaksexperiencedduringtheIranianRevolutionin1970s.Thissurgeishavingacompoundingeffect
on the existing macroeconomic challenges for countries whose domestic economy is consequentially
linkedwiththeinternationaloilmarketandotherproductprices.
Worldoilaveragepricesduring200304wereover11%higherthantheaveragepricesduring200203.
Endofthe200405experiencedasharpupwardswinginprices,withanincreaseofover41%compared
to the average price/barrel in the preceding year. Newer peaks were reported in price/barrel during
200708whena53.4%increaseinpriceswaswitnessed,comparedto200607.Overall,therehasbeen
a360%increaseinprice/barrelofoilsincethefirstquarterof200203totheendof200708,withthe
firstquarterof200809openingintoevenhigheraveragepricesandetchingnewerrecordswithprices
over$140/barrelonagivenday.Figure1graphstherecenttrendsinworldoilprices.
Figure1

Source:EnergyInformationAdministration,2008

Asevidentfromthefigure,arisingtrenddidsetinduring200304.Afteratemporaryfallinpricesinthe
second quarter of 200506 there is a sharp upward swing from the third quarter of 200607 and
onwards.Analystssuggestaninterplayofwiderangingfactorstohavecausedthisrecentupsurgeinthe
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FuelPriceTrends:AnAnalyticalReview

worldoilprices.Stronggrowthoftheworldeconomyafter2003withChinaandIndiaasmajorplayers,
undoubtedly have created exceptional demand for oil.2 In face of increased demand, supply rigidities
notonlycontinuetopersistbutareseeminglycompoundingovertime.AccordingtoarecentIMFpaper
onoilmovementsanditsimpactontheglobaleconomy,evenwithincreasingdemandsidepressures,
the magnitude of price increase is most likely resulting from oil supply factors, with OPECs spare
capacitydiminishing.Additionally,exploitationofuntappedreservesissignificantlyfallingshortofglobal
production of crude oil. 3 According to the IMF, the supply side rigidities, along with geopolitical
scenario have caused oil supply to become markedly binding, thus making it extremely vulnerable to
evenminordisruptions.ThefallinUSdollarshasalsoledproducerstoincreasethedollarpriceinorder
tomaintaintheiroilincomeintermsofstrongercurrencieslikeEuro.Lastly,theofflatespeculativerole
ofinvestmentbanksandkeyoilmarketplayershasalsobeenaccusedofdrivingupworldoilprices.

DomesticPrices
Beinganimporterofoil,thedomesticfurnaceoilpricesinPakistanfollowtherisingtrendwitnessedin
internationalprices.
Figure2.1

TheBPStatisticalReviewofWorldEnergyJune2008,reportsagrowthof7.7%inenergyconsumptionbyChina.Chinaalso
accountedforhalfofglobalenergyconsumptiongrowthduring2007.Indianconsumptiongrewby6.8%,thethirdlargest
volumetricincrementafterChinaandtheUS.
3
Ittakesonanaverage11yearsbeforeanoildiscoveryisreadyforproduction(Elekdag,Selim,ReneLalonde,DouglasLaxton,
DirkMuir,andPaoloPresenti."OilPriceMovementsandtheGlobalEconomy:AModelBasedAssessment."IMFStaffPapers55
(2008):297311)

FuelPriceTrends:AnAnalyticalReview

Figure2.1showsthatdomesticpricesoffurnaceoilroseby25%during200405andover50%byyear
end200506.Withaslightdecelerationinpricesduring200607(1.98%)pricesduring200708posteda
recordincreaseof57.36%.Holistically,itcanbeobservedthatdomesticfurnaceoilpriceshavebeen
followingverycloselythegeneralpricetrendobservedintheinternationaloilmarket.
Figure2.2

AsimilaranalysisofHighSpeedDieselOil(HSD)pricetrendssince200203revealsthatrisesinHSDs
priceshavebeenrelativelylessdrivenbyinternationaloilprices.Pricesrosebyonly7.4%,16.2%,and
5.28%during200304,200405,and200607,respectively.Pricesrosesharplyonlyduring200506by
38.15% and during the last quarter of 200708 by 22%. The reason why HSD did not closely follow
internationalpricetrendswasduetothefactthatthegovernmenthasbeengivingsubsidyondieselto
reduce the impact of soaring oil prices on common man as majority of transport fleet in Pakistan
consumesdiesel.

IMPACTONECONOMY

ImpactonBalanceofPayment(BOP)
TheimpactofhighoilpriceininternationalmarkethasreverberatedwellintoPakistanseconomyand
has exacerbated the already existing imbalances. The effect of increase in international oil prices
remainedrelativelylimiteduntilearly200304.Thiswasduetofavorableglobalconditions,sustainable
level of world prices to domestic consumers, and increase in capital inflow especially remittances.
Furthermore,thiscanalsobeattributedtotheincreaseininternationaloilprices,which wasgradual.
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FuelPriceTrends:AnAnalyticalReview

The recent sharp increase, however, severed through the balance of payments in Pakistan, creating a
substantialgapbetweenexportsandimports(Figure3).
Figure3

Source:SBP

ImpactonExportsandImports
Exports have increased by only 72% since 200203, whereas imports have increased by 227%. This
widening gap has caused the current account to persistently report a deficit, which is growing at
alarminglevels.Bytheendof200708,totalimportsstoodataround$40billion;morethantwicethat
of exports. The acceleration seen in imports is largely being driven by the surge in international oil
prices and the fact that Pakistan is heavily dependent on oil imports. This is further substantiated by
Figure4,whichshowsthattheoilimportbillconstitutesover35%ofthetotalimportvalueduringthe
last quarter of 20078 compared to 25% in the preceding quarter. This share has increased drastically
when compared to the share of 15% in early 200304. This, along with pressure from increased food
prices has constantly come at a cost of shrinking shares on other items such as Machinery and
Agricultural&Otherchemicals.

FuelPriceTrends:AnAnalyticalReview

Figure4

Source:SBP

ThiscertainlyhashadanegativeimpactnotonlyontheBOPbutalsoposesasathreattothelevelof
industrialization and technological improvements to the manufacturing sector which then translates
intodeterioratingexports.Importsoftextilemachineryhavewitnessedanegativegrowthrateof17%
and36%during200506and200607,respectively.Similarly,largescalemanufacturinggrowthtoohas
experiencedaslumpwithrecordingonly4.8%growthduring200708asopposedto8.6%during2006
07.4
FiscalimbalanceshavealsobeencreatedbyGoPscontinuedpolicyofprovidingsubsidyonoilproducts
toprotectpoorhouseholdsandthedomesticindustry.Theburdenofsubsidiesinfaceofeverincreasing
internationalpricesrise,alongwiththedepreciationoftherupeeagainstthedollarandthedebtservice
burdenisaddingtothepressureongovernmentbudgetsandincreasingpoliticalandsocialtensions.

ImpactonInflation
Higheroilpricesdirectlyleadtoincreaseinfoodprices.Asaresulttherewasasubstantialincreasein
head line inflation. The recent need to import food items like wheat, sugar etc, and depreciation of
Pakistanirupeefurtherledtoanincreaseinfoodprices.Duetoincreaseinglobaloilpricesandimport

EconomicSurveyofPakistan200708

FuelPriceTrends:AnAnalyticalReview

bill of food group, headline inflation is constantly going upwards. The impact of inflation would have
been even worse, had the government not offered subsidies on oil products and food commodities.
Figure5showstheinflationexperiencedinfoodpricessince200203inmajorgroups.
Figure5

Similartootherdevelopingcountries(Ethiopia,SriLankaandUkraine),Pakistantoofacedinflationary
impactofrisingfoodandoilpriceswhichislikelytobeamplifiedbycontinuingdemandpressures.Other
thanincreaseinoilprices,thesurgesinfoodpricesisduetowithdrawalorreductionofsubsidyonfood
asexistingsubsidybecametoocostlyforthegovernment.
Soaringoilpriceswithincreasedfoodpricesinevidentlyhaveanegativeimpactongrowthanddriveup
the cost of inputs. Both these factors are posing a great challenge to the macroeconomic situation of
Pakistan. Faced with such a situation, the lowincome households find it very difficult to protect
themselvesagainstinflation,especiallythoselivinginurbanareas.

ImpactonElectricityPrice
Presently, around 30% of the countrys installed generation capacity is based on furnace oil. It is high
timenowthatthecountryshouldreviewitsenergymixandstartmakinggenuineprogressforutilizing
alternate energy sources like wind and solar and for enhancing the share of hydel, as continued high
relianceonfurnaceoilisbecomingmoreandmoreexpensive.Todate,GoPhasbeengivingsubsidyto
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FuelPriceTrends:AnAnalyticalReview

utilitiesfornotpassingontheimpactofhighfuelpricestocustomers.However,sincethebudgetdeficit
hasnowgonebeyondsustainablelimits,thegovernmentisnowmovingawayfromsubsidyandutilities
are now being asked to pass on the impact of fuel prices to the customers. Recently, Nepra has
approved an increase in electricity price up to 60% for distribution companies, which will be
implementedshortly.Sinceelectricityisoneofthemajorcomponentsofmanufacturingcost,thiswill
notonlyincreasetheCPIfurtherbutwouldalsohurtthecompetitivenessofourexports.

CONCLUSION

Oil prices and its fluctuations continue to pose as a consequential macroeconomic concern for both
developedanddevelopingcountries.ForoilimportingcountrieslikePakistantheimpactofirregularand
unexpected price hikes quickly seeps into the domestic economy, threatening the already existing
macroeconomicimbalances.OilpricehikesareaggravatingtheenergyshortageinPakistanwhichisnow
feeding into increased general prices, transportation cost, slowing down agricultural and industrial
productivityandaggravatedwatershortagesfortheruraleconomy.Thisishavinganenormousfinancial
impactonourcompetitivenessintheexternalsector,creatingrecordtradeandBOPgapsanddepleting
ourforeignexchangereserves.Inordertomovetowardsattainingfiscalstabilityandsustainability,the
need for tilting away from heavy reliance on oil imports towards alternative energy and fuel options
nowbecomesincreasinglyimportant.

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EndofReview