Pakistan is not alone, as the global oil market continues to suffer under geopolitical shifts and economic uncertainty. The specter of tariffs has also come to haunt us. In order to appease the other side, the country is exploring the possibility of importing crude oil from the United States—something it has never done before. The idea is still ripe, but it is quickly gaining traction among policymakers, who see it as a potential way to rebalance trade with Washington and navigate the pressure of U.S. tariffs. Let’s explore whether this is practically feasible or not.
The rationale for this move is rooted in the growing trade imbalance between the two countries. Pakistan has a trade surplus with the U.S. to the tune of $3 billion, standing 33rd on the list of countries with which the U.S. has a deficit. This has triggered a 29% tariff on Pakistani goods, part of Trump’s wider plans to bring countries to the negotiation table. Currently, the tariffs are on a 90-day hold, but what happens next is unclear. The Pakistani government has decided to shrink the surplus by importing more from the U.S. (with no fiscal cushion and a perpetual deficit, I don’t know how we will afford that). Various product lines are being explored, but crude oil is at the top.
While the practical mechanism for such an enterprise comes with its challenges, the global oil markets also beckon Pakistan with an unprecedented opportunity. The ongoing escalation between China and the U.S. in the form of tariffs has made the Chinese refiners dramatically reduce their demand for U.S. oil. This has led to an oversupply where WTI midland is widely available, especially for Asian buyers. The surplus puts downward pressure on prices, and this is where regional players, like Pakistan, can negotiate a deal for discounted rates.
Logistically, importing oil from the U.S. is not that easy. First of all, we will have to pay higher transportation costs than our traditional vendors from the Middle East (Saudi Arabia and the UAE). Importing from the U.S. may add $3 in freight costs. Some sources close to the discussions say that the Pakistani government is considering covering most of those extra costs to avoid raising domestic fuel prices. The impact on consumers would be minimal—just about 0.50 rupees per liter. However, I personally believe that will not be the right move. We have a primary deficit, and the reduction of electricity tariffs using the Tariff Distribution Scheme has already set the stage for further fiscal pressure on the national exchequer in the longer run.
There are some technical considerations as well. For instance, the configuration of Pakistani refineries is primarily to handle light, sweet crude. This makes the WTI version, which is also light and sweet, more palatable for domestic processing than the Russian Urals that we wanted to import a few months ago. However, we will have to see if the crude grade blends with already available oil and also yields the desired by-products (high-speed diesel being the most important of them).
In terms of finances, Pakistan has to look at the possibility of whether the U.S. will allow us to have deferred payments, as do our Middle Eastern vendors. For instance, in early 2024, Saudi Arabia extended Pakistan’s $1.2 billion oil financing facility, helping it manage its foreign exchange needs more smoothly. Whether similar terms can be negotiated with the U.S. and its banks must be considered. If we want to reduce our deficit with them, the other side might not be interested in payments that will be deferred!
I believe Pakistan should avoid entering into a commitment that might put further pressure on its fiscal health. Diversifying our trade portfolio and exploring other markets would be the best long-term strategy. There might be some pain in the short run, but diversifying our market is necessary. Central Asia can be the next hub that welcomes our exports.
That said, the U.S. remains Pakistan’s key economic and diplomatic partner, and both countries need each other—Pakistan, of course, more than the U.S. A positive recalibration is very important to address some of the recent dents in the diplomatic relations between both countries.
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Osama Rizvi is an international energy and economic analyst. He is a regular panelist at TRT World, CNBC Arabia and Asharq with Bloomberg. He is a partner at World Times International.