Impact of crude oil prices on Pakistan economy 2015

1. 1. Global Economics umukhtar2015@student.hult.edu Economic Strategy Journal By: UMER

MUKHTAR Impact of Falling Crude Oil Prices on Pakistans Economy 4/16/2015
2. 2. 1 HULT INTERNATIONAL BUSINESS SCHOOL Introduction: The crude oil price is an
important factor for the economy of any country (developed, developing or under-developing
countries). For those countries that produce and export crude oil they would prefer for higher
oil prices. Crude oil exporting countries prefer to sell it for higher prices because it helps
them to increase their foreign reserves to control inflation. Why Oil Prices Are Falling: Crude
oil prices around the world falls, by more than 45% since June, 2014. In June, 2014, the oil
price was $116 per barrel which touches the price of $49 per barrel in the month of March,
2015 and now it is $60 per barrel1 .From past decade, oil prices have been high, bouncing
around $100-$135 per barrel since 2010. High oil prices encourages companies in the US
and Canada to drill more and increase local oil production within the country.The total oil
import of US is 9.9 million barrels per day before domestic production of oil but it drops
approximately 40% of the total oil imports from the OPEC countries. But it is still the second
largest oil importing country after China. The Shale boom threatens dominance of the OPEC
members in GCC like Saudi Arabia, UAE, Qatar and Kuwait. These countries have enjoyed
much with the higher prices of oil. The oil prices basically become the victim of supply and
demand rule. When demand in the international market decreases by US and Canada, oil
prices dropped. Now days, America has become the largest oil producer and it reduces its
import of crude oil. Increased supply of crude oil resulted in price falls in international market.
Slow economic activity lowers down the speed of demand, increased efficiency, and a
growing switch away from oil to other cheap fuels. Other reasons, OPEC countries have
decided not to lose their own market share so they decided to reduce the crude oil prices. 1
Infomine.com/investment/metal-prices/crude-oil/1-year
3. 3. 2 HULT INTERNATIONAL BUSINESS SCHOOL Impact On Pakistans Economy: Pakistani
economy is struggling with slow economic growth rate 4.14%, high inflation rate 7.7% and
circular debt is 2% of total GDP $236.62 billion (Adiqa, 2012).2 Power shortages cut GDP
by 2% according to ADB (Asian Development Bank). Pakistan is not a major oil producing
country (EIA, 2014)3 . Pakistan import crude oil and refines theoil locally for the
consumption. Declining prices encourages OGRA(Oil and Gas Regularity Authority Pakistan)
to issue new licenses to 13 new oil marketing companies and brings new investment in the
Pakistan (F. Babar, 2015)4 In year 2014 Pakistan spend almost $6.7 Billion on the import of
crude oil from August, 2014- December, 2014 (Shahid, 2015)5 . In 2013, Pakistan was
producing only 15.81% (68,000 barrels per day) of its crude oil domestically and its total oil
consumptions were 430,000 barrels per day. Now in 2015 Pakistan increases it local oil
production 110,000 barrels per day. Pakistan said to have large reserves of oil (EIA, 2014)6
. The reserve contains more than nine billions of barrels of oils in Pakistan. If Pakistan starts
local oil production at its full pace, than it can produce 247,500,000 bbl /day in coming years7
.The oil import bill is 35% of the total import bill for Pakistan in the previous year

2014.Declining oil prices helped to cut the import bill for 7.6% in the current fiscal year 2015.
IMF (International Monetary Fund) predicted the import bill in the beginning months of, 2015
will reduce to $14.6b instead of $15.8b (Shahid, 2015)8 . Reduced import bill helped to
maintain the foreign reserve to reduce trade deficits of Pakistan. The total trade deficit of
Pakistan in year 2014 was $16.54 billion. State Bank of Pakistan is enjoying fall in oil prices
by saving foreign reserves and it is also reducing pressure on the declining value of the
Pakistans Rupee (Currency) (Humaiyun, 2015)9 . 2 (AdiqaKiani, 2012) Vol. 2 No. 17 |
Impact of High Oil Prices on Pakistans Economic Growth |www.ijbssnet.com 3
EIA.gov/countries/country-data.cfm?fips=pk 4 (F.Babar)|dailycapital.pk/ogra-to-grantlicenses-to-13-more-oil-companies 5 (Shaid, 2015) State Bank of Pakistan |
Dawn.com/news/1153140 6 EIA.gov/countries/country-data.cfm?fips=pk 7
http://www.globalfirepower.com/country-military-strength-detail.asp?country_id=pakistan 8
(Shaid, 2015) State Bank of Pakistan | Dawn.com/news/1153140 9 (Humaiyun, 2015) |
Pakistantoday.com.pk/2014/12/20/comment/pakistan-and-the-fall-in-oil-prices
4. 4. 3 HULT INTERNATIONAL BUSINESS SCHOOL Falling oil prices also helped to reduce
and control the inflation rate of the Pakistan. In month of December IMF predicts that the
inflation rate will reduce from 7.1% to 3.24% and growth rate of GDP will increase by 5%
(Anwar, 2014)10 . Reduced inflation and oil prices helped in following ways: Decrease in
public and private transportation fares. Cost decrease in agriculture sector. Pay less at
fuel stations (increases purchasing power of households) Production cost of many
industries goes down e.g. Power sector, Paint Industries (oil paint), cement industry In
previous year the maximum inflation rate was 9.2% in April 2014 which declines to 4% in
December 2014 and now it reaches to 3.2% in the month of February 2015.11 The GST is
22% imposed by the government of Pakistan on the commodities but in month of February
2015 government increase the GST tax on petroleum commodities to 27% for tax and
collects total of Rs12 billion in month of February, 2015(Mubarak, 2015)12 .The federal
government will take advantage of this high GST tax on the petroleum prices depending on
the political situation e.g. it can reduces the price by reducing sales tax to give relief to the
households or it can use this tax for generating revenues. It was also noticed that the price of
10 (Anwar,2014)| dawn.com/news/1152848 11 GDPinflation.com/Pakistan 12 (Mubarak,
2015) Fuel price cut but sales tax increases|Dawn.com/news/1160815 0.0% 1.0% 2.0%
3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 2014 2015 Jan Feb Mar Apr May June July
Aug Sept Inflation Rate in Pakistan2014-2015
5. 5. 4 HULT INTERNATIONAL BUSINESS SCHOOL crude oil again started to rise. So the
federal government decided to maintain current prices for the month of the March, 2015 and
if needed it will reduce the tax rate on the petroleum product to give some relief to the
household consumers. OGRA recommended the increase in price by 2.9% but federal
government will consider it only after the month March, 2015. NEPRA reduces the Rs3.24
per unit of electricity. It was a big relief for people in 2015. A total of Rs21.6 billion will be
given as a relief for month of December, 2014 in the bill of March 2015. Power generation
companies use oil for production(Ahmed, 2015).13 In February, IMF noticed GDP growth of
4.7% for Pakistan. This happens because $4billion saving in oil import bill give some space
to the State Bank of Pakistan to control the inflation rate and to save foreign reserves. The

finance minister of Pakistan Ishaq Dar expected to achieve the GDP growth rate of 5.1% till
mid of 2015 (Muzaffar, 2015)14 . Pakistan is agricultural country and its agriculture
contributes 24% of GDP of Pakistan (PBS, 2015)15 . Falling oil prices also helped the
farmers to pay less (40%) for the fuel and electricity bills (Rs3.24 per unit of electricity
consumed) which are used by cultivations machinery. Decline in oil prices also influence the
stock market of Pakistan especially for the PSO (Pakistan State oil first public limited
company of Pakistan). Declining prices resulted in loss of Rs3.53 / per share loss because
the profit margin had reduced due to price cut. Gross margin reduced to 2.5% from 3.83%.
Conclusion: By doing careful analysis of oil price and its impact on Pakistans economy, I
have concluded that it influence the economy at two levels, macro level and micro level. At
macro level it helped to reduce inflation, trade deficits (reduces import bill), production cost of
electricity, transportations fares and increase revenuesgeneration by increasing sales tax.
And at micro level it increase the purchasing power of the households, reduced prices of
household commodities and cheaper electricity per unit rates for household consumption. 13
(Ahmed, 2015) |Dailytimes.com.pk/national/06-Mar-2015/power-tariff-cut-by-rs-3-24-per-unit
14 (Muzaffar,2015) | Khaleejtimes.com.biz/inside | IMF raises Pakistan's GDP growth
outlook 15 (Pakistan Bureau of Statistics, 2015)| pbs.gov.pk/content/agriculture-statistics