As oil prices climb, it’s time to rethink economic strategy

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Oil prices are always a source of contention, yet they remain a critical determinant of any country’s economic activity. Inflation occurs when the price of oil rises, the budget deficit rises, and the currency falls under pressure, making imports more expensive. For all developing economies, including Pakistan, (which is an oil-importing country) rising oil prices is a major source of concern. The period of inexpensive availability of all types of fuel has passed due to increasing population growth, which eventually increases energy consumption domestically, nationally, and worldwide.

Pakistan’s fuel usage has been increasing since 1996-97. The proportion of oil and gas use in the energy mix has shifted dramatically, with gas and oil now accounting for the bulk of consumption across all energy sources.

According to Bloomberg data, Pakistani petrol prices have been slowly rising as the government responds to a global rate hike that has nearly doubled in the previous year. The outrageous rise in gas prices, as well as the continued depreciation of the Pakistani rupee against the US dollar, would set off a new wave of inflation in the country, hampering industrial growth and possibly leading to the closure of industries and significant job losses. The high cost of petroleum supplies has aggravated the predicament of transporters who are already dealing with the effects of the coronavirus outbreak.

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Every two weeks, the government sets the price of POL goods based on the recommendation of the Oil and Gas Regulatory Authority (OGRA). The continued depreciation of the Pakistani rupee against the US dollar has increased the cost of POL commodities in Pakistan. The Pakistan Oil & Gas Regulatory Authority (OGRA) offers various explanations for this expansion. The considerable increase in global oil prices passed the expense on to consumers, as the government is already losing money, and the burden was pushed to individuals.

From September 16, the government passed on an increase in fuel prices of Rs 9 per litre and high-speed diesel rates of Rs 7.01 per litre to customers over the previous two weeks. It increased the MS price to Rs123.30 per litre and the HSD price to Rs120.04 per litre. It also raised the price of motor gasoline by Rs4 per litre to Rs127.30 per litre, and the price of HSD by Rs2 to Rs122.05 per litre, both effective October 1.

Beginning October 16, the price of petrol is expected to rise by Rs7 per litre, while the price of high-speed diesel (HSD) would rise by Rs10 per litre. According to insiders, the government may not be able to drop the higher POL prices this time since it is eager to make the IMF programme effective and is in talks with the IMF.

According to Finance Minister Shaukat Tarin, as talks with the International Monetary Fund (IMF) on tax collection stabilisation continue. He indicated on the ‘Naya Pakistan’ show that the petroleum tax will be hiked up to Rs 600 billion in the coming fiscal year, and that the Levy surcharge would have to be increased in the range of Rs 20 to Rs 25 per litre, up from the current Rs 5.

According to industrial sources, there appears to be no relief in sight for global oil prices, as the average price of Light Arabian (LA) crude oil has risen to $ 79.5 per barrel. According to sources, three factors are causing a jump in oil costs in Pakistan.

  1. High FOB (free on board) price of $85
  2. Premium of $6.8,
  3. US$ exchange rate @ Rs 171.

The HSD premium, they claim, is reasonable at 2.2 percent, but it has an unrivalled FOB price, with the current MS price being $ 88 FOB. Retail fuel prices are currently at their highest in the country’s history, around Rs128 per litre, which has a significant impact on the middle class, as it is used by private vehicles, small automobiles, rickshaws, and two-wheelers. Diesel is also one of the most expensive fuels, costing about Rs 123 per litre. The price of high-speed diesel is highly inflationary since it is used by large transport vehicles, railroads, and agricultural engines such as trucks, buses, tractors, tube-wells, and threshers. It could lead to higher total pricing for all everyday items, making it more difficult for the poor to manage their family finances.