Shakespeare’s Richard III opens with the winter of discontent giving way to glorious summer. Pakistan faces the reverse: a calm autumn is about to give way to a winter of diesel. Prices have risen by more than 40 percent since late February, and they will not fall soon. Some sound policy decisions have been taken, but much work remains.
The Middle East conflict is a major factor behind the tightening diesel market. But global supply has also been severely hit by the Russia-Ukraine war, since Russia is the world’s second-biggest diesel exporter. Ukraine has struck 27 of Russia’s 32 refineries, 18 of them in July alone, forcing Moscow to ban diesel exports.
Prices are unlikely to come down any time soon. The wars have knocked out refining capacity, and the refineries that remain are running at full capacity. The shortage has pushed the crack spread, the price difference between crude oil and diesel, to a record high. Restoring lost capacity will take time. Many Europeans also use diesel to heat their homes, so a harsh winter would pull supplies away from Asia and Africa. That is why diesel is likely to stay expensive into next year, even if crude prices ease.
In many advanced economies, diesel prices have risen twice as much as petrol. Central banks there are playing catch-up with the resulting inflation by raising interest rates. High diesel prices are also causing alarm in Washington as the US heads into the midterms, prompting President Donald Trump to ask G7 nations to release more diesel from their strategic reserves.
Diesel is not a rich man’s fuel. It moves Pakistan’s freight, runs its tractors and powers its tube wells
—Dr Aqdas Afzal
The price rise is sending shockwaves through Pakistan too. Here, diesel is not a rich man’s fuel. It moves the country’s freight, runs its tractors and powers its tube wells. Winter is wheat-sowing season, so today’s diesel price is tomorrow’s flour price. The economy is on the cusp of another inflationary cycle, pushing the State Bank of Pakistan to raise interest rates, a move that will create further challenges for growth and job creation. This is all the more alarming because poverty is rising: the latest World Bank report found the poverty rate rose 6.4 percent over the past six years. Still, it could have been much worse had some key policy decisions not been taken.
While some governments can delay passing on fuel price hikes, Pakistan cannot. In 2022, an embattled government trying to avoid the political cost almost pushed the economy to the brink by refusing to raise fuel prices. That is why the government’s recent move to daily price adjustments is sound policy. Think of a dam in a flood. Release the water as it arrives, and the dam holds. Hold it back, and the pressure builds until the dam bursts. Fuel subsidies work the same way: delay the price increase, and the unpaid bill swells until it breaks the budget.
Federal Minister for Energy (Petroleum Division) Ali Pervaiz Malik has also persuaded local refineries to cap their diesel spread at $38 per barrel, well below global spreads of $90 to $120 this fall. At the same time, the pricing formula for local diesel was changed to remove “import parity,” further lowering the price at the pump.
These timely decisions have kept diesel prices in Pakistan relatively low. But the fuel levy remains deeply unpopular and inflationary. The government has cut the levy on diesel at times to hold prices down, yet it still earns more from each liter than the refineries do. Little can be done about this right now, given Pakistan’s revenue commitments under its IMF program. In the medium term, however, the tax net must be widened to include sectors that do not pay their fair share.
The Prime Minister’s Special Relief Scheme also needs a rethink. To target support better, data on small car and motorcycle ownership and low socioeconomic status should be combined to identify citizens in genuine need. Using a similar approach, the government should consider expanding the scheme to provide subsidized diesel to small farmers, since rising farm costs will inevitably show up later in food prices.
Looking ahead, policymakers must keep a close watch on the $5 billion upgrade agreement with Pakistan’s refineries. Once the upgrade is complete, Pakistan will be able to meet all of its diesel needs domestically, up from roughly 70 percent today, and may even become a net exporter.
Shakespeare’s winter turned to summer. Pakistan’s winter of diesel can too. Daily pricing and capped spreads buy time, not security. Only enough diesel refined at home can deliver that. Until then, every European winter will be paid for at Pakistan’s pumps.
Dr. Aqdas Afzal completed his doctorate in economics on a Fulbright scholarship. X: @AqdasAfzal
