Petrol Prices in Pakistan: What’s Driving the Latest Spike?
- Current Petrol Rates in Pakistan: Petrol prices in Pakistan have reached unprecedented levels due to the country’s heavy reliance on imported oil and fluctuating global crude oil prices. Exchange rate instability and geopolitical events further exacerbate the issue.
- Underlying Causes of Price Hikes: Key drivers include international oil price volatility, depreciation of the Pakistani Rupee, high demand, supply chain inefficiencies, and government policies such as reduced subsidies and potential taxation.
- Economic Impact: Rising petrol prices increase production and transportation costs, contributing to inflation, reduced purchasing power, and economic instability. This impacts industries, infrastructure development, and overall GDP growth in Pakistan.
Petrol, often called the “liquid gold” of our time, is incredibly valuable because of its vital role in the modern world. The way we view petroleum changed dramatically after fossil fuels were discovered, quickly becoming essential energy sources for homes and industries alike. Found naturally as crude oil, petrol is extracted from deep underground reservoirs and refined for various uses. The Industrial Revolution was a pivotal moment, as the demand for fuel surged to operate new machinery, making steam engines less practical for large-scale tasks. The rise of the automotive industry in the early 20th century further expanded the market for petroleum-based fuels. Today, globalization, rapid urbanization, and population growth continue to drive an increasing demand for petrol and its byproducts. In Pakistan, petrol prices have soared to unprecedented levels.
Petroleum has become essential in nearly every industry. Its applications include pharmaceutical manufacturing, agriculture, power generation, chemical production, and transportation, among others. Since the 19th century, petroleum production has skyrocketed; the Organization of the Petroleum Exporting Countries (OPEC) reports that 40,000 barrels are produced every minute worldwide. This staggering output highlights petroleum’s unmatched influence on the global economy.
Petrol’s Influence on the Global Economy
The modern world’s dependence on petrol is undeniable. The oil industry, due to its significant impact, is one of the most closely monitored sectors, as shifts in production, supply, demand, and pricing can affect economies and individuals around the globe. Oil prices influence not only trade relations but also national economic policies. Countries that are less affected by changes in crude oil prices tend to show greater economic stability, while those that rely heavily on oil imports often face economic instability with price fluctuations. Additionally, the petroleum sector plays a crucial role in shaping nations’ balance of payments and development strategies.
Petrol prices can vary due to a range of factors, primarily driven by supply and demand. When demand surpasses supply, prices tend to increase. For instance, following Russia’s invasion of Ukraine, oil and gas prices surged due to sanctions against Russia and a global decrease in Russian oil imports, which heightened demand. In contrast, during the COVID-19 pandemic, global lockdowns led to a drop in fuel consumption, resulting in lower petrol prices due to an oversupply.
Other elements that affect global oil prices include political instability, natural disasters that disrupt production and supply, interest rates, the strength of the U.S. dollar, and production costs. Major oil producers include Venezuela, Saudi Arabia, Canada, Iran, Iraq, and Kuwait, while significant importers consist of China, the U.S., and Europe.
Pakistan’s Petroleum Landscape
Pakistan is the 33rd largest consumer of petroleum, according to the Trade Development Authority of Pakistan (TDAP). Although the country has domestic oil reserves, it still imports a large amount of petroleum products, spending billions each year, as local production meets only about one-fifth of its oil requirements.
In 2022, the value of Pakistan’s petroleum imports was around USD 5.23 billion. The United States Energy Information Administration reports that Pakistan has over 9 billion barrels of petroleum reserves. However, several factors lead to its dependence on imported petroleum. While there are significant hydrocarbon resources in Pakistan, many remain untapped or underutilized. The country mainly imports refined petroleum products due to a lack of infrastructure for refining crude oil domestically. Existing oil and gas reserves have diminished, and there has been little effort to explore new resources, which increases reliance on imports.
Petroleum is mainly utilized in three sectors in Pakistan: transportation (60%), power generation (32%), and industry (8%). It is the second-largest energy source in the country, following natural gas. To lessen its dependence on petroleum, Pakistan could explore renewable energy sources, which are plentiful but not fully utilized. The limited use of solar, wind, biomass, and geothermal energy has compelled the nation to depend on expensive fuel imports for electricity generation. This situation, combined with rapid population growth, has led to rising petrol prices, further increasing the import bill.
Price Fluctuations and Economic Impact
Petrol prices in Pakistan are quite unstable, largely due to the country’s reliance on imported oil. Any changes in global oil prices have a direct effect on domestic fuel costs and the overall economy. The depreciation of the Pakistani Rupee (PKR) against the U.S. dollar is another significant factor affecting petrol prices. Even if international oil prices stay the same, fluctuations in the exchange rate can cause local petrol prices to rise or fall. Other influences include geopolitical events, national economic conditions, and government policies.
In Pakistan, the Oil and Gas Regulatory Authority (OGRA) determines petrol prices for consumers, considering various factors. Government subsidies also play a role in petrol pricing; alterations in these subsidies can lead to notable price changes. Political instability and conditions set by the International Monetary Fund (IMF) have resulted in subsidy reductions, which have contributed to rising fuel prices.
Local supply and demand dynamics similarly impact petrol prices, just like in global markets. Prices tend to increase during times of high demand. The final price consumers pay includes several elements, such as the ex-refinery price, Inland Freight Equalization Margin (IFEM), Oil Marketing Company Margin, and Dealer Margin. For instance, after crude oil is refined in Pakistan, it is sold to oil marketing companies at the ex-refinery price. The IFEM mechanism ensures consistent pricing across different depots, taking into account transportation methods and costs. Oil marketing companies and dealers add their own margins, and any rise in these margins can lead to an increase in petrol prices.
Taxes also play a role in determining petrol prices. Although the General Sales Tax (GST) on petroleum products is currently not in effect, the IMF has suggested reinstating an 18% GST, which would likely result in higher prices.
Economic and Industrial Impacts
The impact of petrol prices on Pakistan’s economy and development is significant. An increase in petrol prices affects not only individual livelihoods but also industries and overall economic growth. Research shows that rising oil prices can have a long-term detrimental effect on Pakistan’s GDP.
When petroleum prices go up, production costs rise, which in turn leads to higher prices for goods and an increased cost of living. This situation can result in decreased productivity, lower levels of consumption, reduced investment, and sluggish economic growth. Additionally, a higher import bill can widen the trade deficit and negatively affect the balance of payments. Elevated transportation and production costs may also stall infrastructure projects and diminish export competitiveness. This challenging environment has led to lower per capita income, high inflation, and increased electricity costs. The intricate relationship between Pakistan’s economy and its reliance on petroleum is a key factor in its status as a developing nation.
Solutions and Future Directions
To tackle these challenges, Pakistan needs to focus on attracting foreign direct investment (FDI) and enhancing the value of the rupee. There should be an increased effort to explore new hydrocarbon resources while also making efficient use of existing ones. As noted by TDAP, Pakistan could save USD 923.3 million by refining imported crude oil domestically, which underscores the importance of expanding and modernizing the refining infrastructure.
Crucially, Pakistan should also pivot towards renewable energy solutions. By investing in water, wind, solar, and biomass energy, the country can lessen its reliance on oil imports and promote a cleaner, more sustainable energy future.
The author is a pharmacist with keen interests in politics and society.
