OPEC’s decision and Pakistan’s energy security
https://arab.news/yhtpu
Globally, fuel prices have once again started inching upwards after the decision by OPEC members to cut oil supplies by 2m barrels per day. This is roughly equal to 2.1% of global supply. The announcement has come as a surprise given that there was pressure from the US not to move in this direction.
The Biden administration had communicated to oil producing countries that such a move could contribute to already high global inflation. The response from some OPEC member countries including Saudi Arabia was that this move was in line with market expectations and most market analysts had anticipated this. In fact, CNN had reported that OPEC members could increase prices in October given recession fears.
Now that this measure has been announced, the week following the October 5 decision has seen Brent crude’s price increase by 2.3%. Whether it will continue its rising streak depends on how fast global recessionary conditions set in.
While in the west, the coming of winter has already implied rising diesel prices owing to the seasonal increase in heating oil demand. The two things which will follow include: rationing of fuel for industrial and commercial consumers including in countries such as Pakistan (net-importers of fuel), and second, increase in price charged to both residential and commercial users of fuel. The hike in retail prices compress the overall demand in the economy which could easily dampen GDP growth for the ongoing year- already under pressure due to the aftermath of the floods.
In the economic growth equation, this will not be good news for Pakistan’s large scale manufacturing (LSM) and merchandise exports. The LSM has already shrunk by 16.5 percent in July compared with the previous month and dropped 1.4 percent if compared to July of last year. Within the manufacturing sector, almost 16 percent is contributed by the small and medium enterprises (SMEs) who are already finding the rising input costs hard to bear and many in the formal sector are on the brink of a temporary shut down.
While low economic growth is bound to negatively impact both formal and informal employment levels across the country, the central bank has favored low growth prospects for this year as it will help in suppressing price inflation. While the State Bank of Pakistan (SBP) has projected almost 20% inflation for the ongoing fiscal year, the monetary policy statement fell short of highlighting the impact that OPEC’s decision will have which will be over and above 20% projected increase by SBP.
There is room in provincial budgets to protect family budgets from facing an additional crunch. However, in an environment where Lahore and Peshawar are not keen to work with Islamabad, Sindh and other federating units, a coordinated response to price inflation seems unlikely.
Dr. Vaqar Ahmed
As the government has indicated its intent to engage with the IMF in expectation of leniency in the remaining tenure of the extended fund facility, rising external prices of fuel or rather the uncertainty for net-importing countries after OPEC’s decision should be carefully studied by the finance division and a strong case presented to development partners including the IMF.
The PML-N led coalition party PDM could see its popularity dwindle if during the next few quarters, increased import prices of fuel are passed on to end-consumers. Going into elections in 2023, PML-N will have to fight the temptation of running unfunded subsidies to redeem its voter base. While the definition of lifeline consumer can be revisited both in residential and commercial spaces, the need for better targeting of beneficiaries of energy subsidies (on scientific lines) still remains a work-in-progress.
There is room in provincial budgets to protect family budgets from facing an additional crunch. However, in an environment where Lahore and Peshawar are not keen to work with Islamabad, Sindh and other federating units, a coordinated response to price inflation seems unlikely. In July, all parties including PTI had endorsed the idea of a Charter of Economy, but precisely due to the reason explained above, the idea remains a non-starter.
In the longer term, there is no substitute for rethinking the energy mix in Pakistan. As the import of energy supplies touched $24 billion, it is only prudent that the government has moved forward with the inauguration of the 330-megawatt power plant of Thar Energy Limited (TEL) with further additions to follow. On this subject, one hopes that due care will be observed when it comes to the environmental and climate considerations which are necessary when exploring coal-based supplies. Energy systems efficiency and an effective response to technical losses in transmission and distribution of energy is another area which could save foreign exchange.
- Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.
Twitter: @vaqarahmed
