RESEARCH REPORT ON Variations in Energy mix and its effect on Economic Growth (Case study Of Pakistan)

SUBMITTED TO: Imtiaz Arif

SUBMITTED BY: Anwar Ul Hq REG # 3121

TABLE OF CONTENTS
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1. Abstract

...... 4-6

2. Introduction.
3. Literature review.... 7-8

2.1 2.2

Theoretical Background Empirical Studies

4. Objective9

5. Modeling Framework ...... 9 4.1 4.2 Methodology Hypothesis

6. Estimation and result..... 10-12

7. Conclusion & Recommendation..... 13

8. Reference...... 14

1.
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Abstract

Like every other country Pakistan also is energy hungry. The different sources of energy it uses are fast depleting and the demand is increasing any folds. Every nation that is successful owes its success in the energy consumption and the manner in which they did it. Pakistan economic growth is also effected by any volatility in the energy mix it uses. We have seen that gas and electricity are the major variables in the sustainable economic growth followed by Oil and coal. What Pakistan must do is to maximize its current production and chalk out a separate plan for both Energy conservation and consumption for each sector of the economy. Other than this it must also start tapping the unused natural and un natural resources it has for fulfilling its energy needs. It has great potential in the Thar coals, there is plenty of wind available in the coastal areas, and the use of solar energy is also there. The need of the time is to start relying on the sources we havent touched, with the fast depleting reserves and the rising prices of Oil the energy crises will get worsen, this will have a very negative effect on our economic growth.

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Introduction:

Pakistan is presently facing a serious energy crisis. Despite strong economic growth during the past decade and consequent rising demand for energy, no worthwhile steps have been taken to install new capacity for generation of the required energy sources. Now, the demand exceeds supply and hence load-shedding is a common phenomenon through frequent power shutdowns. Pakistan needs about 14000-15000MW electricity per day, and the demand is likely to rise to approximately 20,000 MW per day by 2010. Presently, it can produce about 11, 500 MW per day and thus there is a shortfall of about 3000-4000MW per day. This shortage is badly affecting industry, commerce and daily life of people. APTMA was forced to accept volunteer load shedding of 5 hours each day on all units. And the residential areas were with out power maximum time of the day. The situation was worsened because Sui Gas Company already stopped the supply of industrial units and was going through a system of load shedding it self. Therefore captive units were shut off due to non availability of the gas. The IPP who were operating on furnace could not get the regular supply of furnace and they did not bother to keep enough stock for contingency therefore stop shutting. And then naturally the blame game started, starting from the water shortage in Dams to furnace oil transportation problem, violence in Sind and maintenance activity in some independent power producers. Now it is officially declared that in last 10 years not a singles MW was added. We have seen hundreds of seminars, conferences and events on energy issues in Pakistan. The money wasted there if utilized then at least we can add few hundreds MW of Power. WAPDA is in favor of large dams and thinks that the delay of construction of large dams was the basic reason for the shortage of power. The issue is very controversial subject and it is
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not expected to resolve soon. Moreover the construction of the dam will take at least 10 years and if the situation persist our economy will then come to a stage where it will need any power any more. The situation demands an urgent decision. Decision which is vital for the safety stability and survival of Pakistan, Energy is a key factor for the stability and prosperity of Pakistan. If our production units keep on shutting then unemployment will rise and hence street violence will rise. This is the time to restructure our energy policy. In our opinion instead of many agencies one central ministry should look after the energy issues in Pakistan. This is utmost important that an environment should be created where the investments are made in energy sector. Recently Government is advocating a policy of promoting the investment in Private Sector. Although the response is favorable but the out come is very slow. Now Government has to make a huge investment in energy sector. And the investment has to be in direct purchase of power plants, manufacturing main and auxiliary units, the objective should be utilization of diversified energy resources. It is imperative that renewable energy resources should be explored but still conventional thermal and coal fired power plants should be established. The strategy should be to explore indigenous local resources. For example furnace oil plants are best suited in Karachi where the port and refinery facilities are available. Gas plants to be installed in Baluchistan, Sind and K.P near to existing gas fields. K.P should explore medium, small and micro size hydro projects. Sind must use its Coal reserves. Wind turbines to be installed in coastal belt, and Punjab must explore bio-gas and city waste plants. Pakistan is in need of energy very badly and urgently.

A dedicated campaign of energy conservation is needed to spread the awareness of energy conservation programs. This is also believed that in general major energy consumers have little or no awareness of energy saving procedures. The machinery when purchased a very little emphasis is given on electrical or mechanical efficiency of the plant. The result is that our production units are consuming much more energy than their competitors resulting their product cost high and it is not competitive in international market. Energy conservation is indeed energy production. So if an investment is made in this sector then it will pay back in 3-5 years. This is the responsibility of Government to start various energy conservation programs suited for various industries.

Table evaluating Pakistans Energy Supply. Sector Oil

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Energy Supply 29.40%

Natural Gas Hydroelectricity Nuclear Coal LPG

50.30% 15.69% 1.20% 7.60% 0.40%

Diagram evaluating Pakistans Energy Supply.

3.

REVIEW OF LITERATURE
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3.1 Theoretical Background: Oil: For development point of view oil is an important source of energy. in Pakistan

scenario, 36% oil is used in power generation, 12 % in industrial sector, 48% in transport sector and remaining used for residential purpose. Electricity: Same as oil electricity is another source which play major role in economy. It is used in industrial sector as well as residential sector. Pakistan generates electricity from oil, natural gas, hydropower and nuclear. Research shows that there is strong relation between oil and electricity because countrys 36 % power generated by oil. It also shows that whenever oil prices increases electricity price also increases, consequently the prices of all essential commodities also increases. Coal: Pakistan has coal resources estimated at over 185 billion tonnes, including 175 billion tonnes identified at Thar coalfields in Sindh province. the total production of coal has increased by 10.0 percent during JulyMarch 200910 over the corresponding period last year .This improvement owes to increased import of coal during the period as indigenous production of coal witnessed a decline 6.5 percent. As a result, share of coal imports in overall availability of coal, increased from 62.2 percent in JulyMarch 2008 09 to 67.9 percent during current fiscal year.
3.2 Empirical Studies:

Various studies carried out to estimate the relationship between component of energy consumptions and their effect on national growth.

(Ara.i, 2005) in her paper has assessed the competitiveness of manufacturing sector of Pakistan by comparing the trend in the growth of factor and non-factor input prices with that of overall inflation in the economy and export price. To make this comparison more meaningful the paper has also looked at the trend in the growth of productivity. It has found that over the period 1972-73 to 2002-03, the price of energy, price of machinery and transport and wages have grown faster than the general price level. Moreover, both the composite factor input price index and composite non-factor input price index have grown at a rate higher than that of export price index. (Quyum A, 2008) using the Haussmann et al. (2005) decision tree methodology we have analyzed as to what constitutes the binding constraint to growth in Pakistan. The decision tree suggest that investment and hence growth may be constrained either due high cost of finance or due to low return to economic activity. We ruled out the high cost of finance being a binding constraint to growth in Pakistan. As per the framework followed in this study, the primary reason for the cost of finance being high could be the low saving rate of the economy. Given the criteria, we do not consider Pakistan to be a savings constrained country because anything that is scarce carries a high price. Thus if the saving rate is low one should observe willingness to remunerate savings at higher rate. (S, 2000) in his paper found that the main challenges emanating from the enforcement of the WTO-based trade system, on the domestic front, are: how to maintain competitiveness in the face of falling protection to industry through reduction in tariffs; and how to pursue national industrialization objectives when indigenization programs are to be phased out. These needs to be handled through a close partnership between public and private sector. While the actual

responsibility for restructuring the industrial sector lies with the private firms, the government may help by providing an enabling environment for the required restructuring. (A, 2008) investigated that since 2003 to 2007 oil prices are constantly on rising. This rising trend in oil price in the international market ha hurt the economies of many countries including Pakistan. The result of price shock depends on countrys dependency on oil. Research also shows that oil price impact on macroeconomics. High oil price s lead to inflation, increased input costs, reduced non-oil demand and lower investment in net oil importing countries. (Bank, 2008) published an Analytical Review and analyze that high degree of dependence on oil and irregularities in prices supplies has pervasive effect for an economy that imports oil to cater to its often fragile industry. Review also shows that the impact of high oil price in international market has reverberated well into Pakistans economy and has exacerbated the already existing imbalances. According to review around 30% of the countrys installed generation capacity is based on furnace oil. Its means that countrys electricity related to oil and change in oil price effect electricity price. Due to high oil prices imports have increased by 227% whereas exports have increased by only 72%. This widening gap has caused the current account to persistently report deficit, which is alarming level. (mohammad, 2010) wrote in his journal and analyze that country is heavily dependent on imported energy resources. Pakistan currently meets only 19.9% of its oil demand from indigenous production and as such imports 15.54 M ton of petroleum and petroleum products during 2005-06. The total installed capacity of Pakistans power generation is 19521 MW
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(Megawatt). This is includes thermal power plants in the public and private sectors, hydro and nuclear power stations in the public sector. Research paper also shows that increase in oil price leads to increased imports bills, electricity and other macroeconomic fundamentals of the economy.
(M.A, 2009) in his paper reviewed the energy demands of Pakistan. the main results suggest that

electricity and coal consumption responds positively to changes in real income per capita and negatively to changes in domestic price level. The gas consumption responds negatively to real income and price changes in the short run, however, in the long-run real income exerts positive effect on gas consumption, while domestic price remains insignificant. Furthermore, in the short-run the average elasticities of price and real income for gas consumption (in absolute terms) are greater than that of electricity and coal consumption.

4.

OBJECTIVE OF THE STUDY The main objective of research is to show the impact of consumptions of energy components on the economic growth. Variables:
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Economic growth (Dependent) Electricity Gas Oil (Independent) (Independent) (Independent)

Direction of Relations:
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Energy mix positively influence the economic growth

Sources of Data data is collected from hand book of statistics on Pakistan Economy, Economic survey of Pakistan, American energy data base and (www.sbp.org.pk). 4. MODELING FRAMEWORK 4.1: Methodology This section presents a behavioral function of economic growth, Electricity, Oil and coal specified as follows: GDP = f (Elect,Oil, Gas) GDP = + 1 ( Electricity) + 2 (Oil) + 3 (Gas) + The is the error term. In the above equation . 5. ESTIMATIONS & RESULTS 5.1 Suggested Analysis Here we are analyzing the relationship of one dependent variable with three independent variable for this purpose OLS ( ordinary least square) method is used. from the website of state bank of Pakistan

5.2 Results

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TABLE 1

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood

0.515402 0.407713 1.597173 22.95865 20.91999

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion Durbin-Watson stat

5.016667 2.075324 3.986665 4.107892 1.462024

INTERPRETATION TABLE 1 gives info about the independent variables, their significance and their correlation. R-value which defines the correlation between the observed and predicted values of the dependent variable. R -square value tells about the accuracy or adequacy. Here the value of R- square is .515 which shows that there is strong correlation between the variables. Adjusted RSquare gives more accurate value which is 0.4077, which means that independent variables can predict the dependent variable up to 40.%. TABLE 2 Dependent Variable: GDP Method: Least Squares Sample: 1999 2010 Included observations: 12
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Coefficie Variable OIL GAS ELEC nt 0.131764 4.634879 0.187236 Std. Error 0.094992 1.710658 0.093902 t-Statistic 1.387104 2.709414 1.993954 Prob. 0.1988 0.0240 0.0773

INTERPRETATION TABLE-2 representing the p-value of independent variables .The test gives different pvalues for the three independent variables, Gas has been the most significant factor, followed by the electricity and oil consumption. What this means is that the Economic growth is significantly influenced by this energy mix, or we can put it like this that as the consumption of these variables increases so does the overall economic growth

GDP = + .1872 ( Electricity) + 0.1317 (Oil) + 4.634 (Gas) +

6. CONCLUSION AND POLICY RECOMMENDATION: Pakistan should look all alternatives to increase its electrical Energy Mix the coming years. This is a very challenging and difficult task. But if it fails its target then all other indicators will go negative leaving behind a disastrous situation. A dedicated campaign of energy conservation is needed to spread the awareness of energy conservation programs. This is also believed that in general major energy consumers have
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little or no awareness of energy saving procedures. The machinery when purchased a very little emphasis is given on electrical or mechanical efficiency of the plant. The result is that our production units are consuming much more energy than their competitors resulting their product cost high and it is not competitive in international market. Since Energy conservation is energy production. So if an investment is made in this sector then it will pay back in 3-5 years. As we have seen the positive effect the various energy variables has on the economy its urgent need that due attention is paid to this, with the changing world and furious competition, the only thing that can save us is innovation and the self reliance, there is a dire need to tap the various energy sources, including the Thar coal, Wind solar Bio etc. The energy needs of the whole world is increasing and so does ours, but it needs to be in the direction of economic growth and little dependency on the outside world. Govt is strongly urged to start programs which are directed individually towards each sectors of the economy and as a whole towards better and efficient use of the various energy sources we have, as well as the one which can be used.

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7.

REFERENCES: Afia, M. (2008). How pakistan is coping with high oil prices. Pakistan developmental Economics Ara.i. (2005). Is Pakistan's Manufactutring Sector Competitive. Conference Paper No 59 PSDE . Bank, S. (2008). Fuel price Trend. Analytical review . Malik.A, K. (2009). Energy Demand in Pakistan. MPRA . Mohammad, S. D. (2010). Impact of oil price variability on export earning of Pakistan. European journal of Scientific research , 543-551. Quyum A, H. (2008). Grwoth Diagnostics in Pakistan . European jouranl of seicntic research , 433-450. S, M. (2000). Trade and Industrial Policy in Pakistan. World Bank .

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