The crashing oil markets and Pakistan
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The kingdom of Saudi Arabia and Russia came together to form OPEC alliance in 2016 after oil prices plunged to $30 a barrel. Since then, the two leading exporters have orchestrated supply cuts of 2.1 million barrels per day. Saudi Arabia wanted to increase that number to 3.6 million barrels through 2020 to take account of weaker consumption.
But Russian President Vladimir Putin, worried about ceding too much ground to American oil producers, refused to go along with the plan and his energy minister, Alexander Novak signalled a fierce battle to come for market share when he said countries could produce as much as they please from April 1.
Brent crude futures fell by as much as $14.25, or 31.5%, to $31.02 a barrel. That was the biggest percentage drop since January 17, 1991, at the start of the first Gulf War, and the lowest since February 12, 2016. The International Energy Agency says that it expects demand will contract this year for the first time since the recession in 2009 that followed the global financial crisis.
The coronavirus has undermined energy demand worldwide, but especially in China, which is now the number one importer of crude oil, guzzling roughly 10 million barrels a day.
Big importing nations such as China, India and Germany could get some much needed relief from falling energy bills. And consumers benefit in general from lower oil prices and the resulting decline in gas prices at the pump, especially in the United States where retail markets react more directly to supply and demand. Taxes and surcharges make up a higher share of pump prices in Europe, so the effect is less marked.
Pakistan has the option of securing ‘forward buying’ contracts with oil suppliers to benefit from the plunge in crude prices. Pakistan must create strategic crude stocks on a war footing to benefit from the situation.
Hina Ayra
It is difficult to see any winners-- the major oil producing countries will lose money regardless of the market share they can claw back. Russia claims to be the most insulated to lower prices because its annual budget is based on an average price of roughly $40 a barrel. US sanctions have forced it to become more efficient.
In the midst of every crisis, lies great opportunity. The falling oil prices in the global market will benefit Pakistan in reducing its current account deficit.
Decline in oil prices is positive for power, cement, oil marketing, auto, steel and refining sectors while it is neutral for textile and insurance industries.
Pakistan has the option of securing ‘forward buying’ contracts with oil suppliers to benefit from the plunge in crude prices. Pakistan must create strategic crude stocks on a war footing to benefit from the situation.
It is an ideal time to buy additional crude for storage across the country, Pakistan should talk to oil producing countries which are looking for markets to import oil at a discount. Pakistan depended on the import of crude oil to feed refineries and therefore it was an ideal time to strike deals for crude oil import. For Pakistan, it is a good opportunity to secure oil contracts at considerably discounted prices. Dependency on imported gas and crude oil should be limited, as the major portion of our import bill comprises of crude, because the reduction from US shale is temporary.
Whenever the price of oil goes up and investment becomes marginally profitable, the US will start pumping oil into the market again as the cost of drilling shale well is reasonably low at $7 million and takes up to 20 days to drill. Moreover, in OPEC, the Saudi government reserve is shrinking by more than $100 billion per year and if the prices remain low, OPEC countries will face a serious economic debacle.
In a space of just one year, Saudi reserves shrunk from $750 billion to $620 billion. The current oil prices present Pakistan with an opportunity to import higher volume of crude. In 2007-08, Pakistan’s imports were over 175,000 b/d when oil prices averaged more than $80 per barrel. However, the volume of oil imports in 2014-15 did not change much, even though prices were averaging $50 per barrel.
According to a report by Topline Securities the global drop in oil prices will likely benefit Pakistan's macro-economic indicators even though oil companies will take a hit due to the drop.
“We believe lower oil prices are a net positive for Pakistan’s macros (especially the external account), as 26% of Pakistan’s imports are oil price-driven,” said the firm in a report published on March 09. It added that if oil prices drop to $20 per barrel, Pakistan’s oil import bill would decrease by $ 38-4.2 billion. The firm is also forecasting that exports and remittances could see a cumulative reduction by around $1-2 billion.
Hence, on a net basis, Pakistan’s external account could potentially improve by US$2.2-2.8 billion (50 percent of the current account deficit) due to $20 per barrel lower oil prices. It also expected the greenback to remain stable against the Rupee in the near future.
*Hina Ayra is an economist, business consultant and a writer. Twitter: @HinaAyra
