Petrol is known as the liquid gold of the modern world and rightly so because of the value it holds today. The global outlook on petroleum changed entirely after fossil fuels were discovered. They were readily adapted as energy resources and widely used for domestic and commercial/industrial purposes. Petrol, naturally occurring as crude oil, is found in deep underground reservoirs form where it is extracted and refined for use. After the Industrial Revolution, the significance of petroleum increased as there was a vast demand for fuel for the newly introduced machinery in the industrial sector. The steam engines suddenly became lagging and inefficient for large-scale usage. The market for petroleum-based fuel grew even more after the automotive industry got a boost in the early 20th century. Today, as a consequence of globalization, rapid urbanization, population growth, and many other factors, the demand for petrol and petroleum-based products is increasing. The petrol prices in Pakistan are sky-high.
There is hardly any industry where petroleum is not used today. From pharmaceutical industries, the agricultural sector and power plants to chemical industries and the transport sector, etc., the use of petroleum-based products is widespread. Henceforth, the production of petroleum products has also greatly increased since the 19th century because according to the statistics given by the Organization of the Petroleum Exporting Countries (OPEC), 40,000 barrels per minute are being produced every day across the whole world. Due to its unparalleled significance, this black gold has earned a decisive role in the global economy.
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Petrol and the Global Economy
It is a fact that the present-day world is dependent on petrol. Due to its importance and impact, the oil industry is one of the most closely monitored industries. Its production, supply, demand and price affect every economy and every person. Petrol not only impacts the trading between nations but also determines their economic interests. Therefore, the nations that are less affected by the change in the price of a barrel of crude oil are the most stable nations as opposed to those whose economies are shaken when there is fluctuation in the oil price. The petroleum industry also has a hand in the balance of payments and developmental sector of countries.
Due to its significance in economic development, petrol prices fluctuate just like any other commodity. This fluctuation can be attributed to the supply and demand of the petroleum. When demand is more than the supply, prices tend to rise. An example of this would be the time when Russia invaded Ukraine, the oil and gas prices went high. This was majorly due to the sanctions on Russia and the majority of the nation’s boycotting Russian oil which resulted in an increased demand for petroleum. Whereas, when the world went into lockdown during the COVID-19 pandemic, petrol prices were slashed globally because the supply was more than the demand.
Other factors that affect international petrol prices include political instability and natural disasters that may halt the production or supply of petroleum, interest rates and impact of the U.S. dollar and lastly the production cost of the petroleum. Top oil-producing countries include Venezuela, Saudi Arabia, Canada, Iran, Iraq Kuwait, etc. whereas China, Europe, U.S. are among the top importers of petroleum.
Pakistan and Petroleum
According to the Trade Development Authority of Pakistan (TDAP), Pakistan is the 33rd largest consumer of petroleum. Despite having its own oil reserves, Pakistan still has to import petroleum products worth millions of dollars because it produces only 1/5th of the total oil supply locally.
In 2022, Pakistan imported U.S.D. 5.23 billion worth of petroleum. According to the United States Energy Information Administration, Pakistan has more than 9 billion barrels of petroleum. Despite this statistic, Pakistan’s fuel imports can be attributed to many reasons. Pakistan has abundant hydrocarbon reserves that are either under-utilized or untapped. Pakistan mostly imports refined petrol instead of crude oil because it lacks the infrastructure to refine the crude oil. Pakistan’s current oil and gas reserves have shrunk to dangerous levels and little to no effort is being made to utilize the untapped reserves which has further increased our dependence on imported oil.
Pakistan uses petroleum in three main sectors namely transportation, power and industrial sector with the transport sector using 60%, the power sector using 32% and the industrial sector using 8%. Petroleum serves as the second largest source of energy in the country, gas being the first. Petroleum can be replaced or its usage-percentage can be lowered if Pakistan uses its abundantly occurring renewable energy resources in the power generating sector. There is an extreme underutilization of biomass, solar, wind and geothermal resources that, to cover the energy demand, has caused Pakistan to import expensive fuel for power generation as well. With exponential population growth, the petrol prices in Pakistan have also risen, further increasing our import bill.
Fluctuation in Petrol Prices in Pakistan
Petrol prices in Pakistan are always intensely fluctuating. Since the state is so dependent on imported petroleum, a change in oil prices in the international market drastically impacts the fuel prices and in turn, also impacts the country’s economy. Another major factor that causes a change in petrol prices is the depreciating value of the Rupee against the U.S. dollar. While petroleum prices may remain stable in the international market, the rise or fall in the value of PKR against the U.S.D contributes to the decrease or increase of petrol prices locally. Other factors that affect petrol pricing include geopolitical factors, the country’s economy, and government policies.
In Pakistan, the Oil and Gas Regulatory Authority (OGRA) determines the petrol prices for end-consumers. For end-consumers, the petrol prices are dependent on many factors. The government has provided subsidies to determine the rate of petrol. High fluctuation in petrol prices can be due to the provision or slashing of subsidies. Due to political instability and the conditions given by the IMF, petrol subsidies have been slashed due to which the fuel prices in Pakistan have skyrocketed.
Local demand and supply also affect petrol prices and the mechanism is similar to that of international demand and supply. During peak seasons, when the demand for petroleum products is higher, there is an increase in the price. Ex-refinery price, Inland Freight Equalization Margin (IFEM), Oil Marketing Company Margin, and Dealer margin are the main components that determine the rate at which petrol is sold in Pakistan.
When imported crude oil reaches Pakistan, it needs to be refined first. There are oil refineries in Pakistan that do the job. After refining the oil, refineries sell it to oil marketing companies at a price known as ex-refinery price. After that, the IFEM mechanism is used to ensure the price of petrol remains uniform at all the depot locations of the country no matter the distance, mode and cost of transportation. That freight margin is also added to the petrol cost. Oil marketing companies and dealers also add their profit margins to the petrol cost. If these companies and dealers demand to increase their profit margins, then a hike in petrol price is seen.
Lastly, the petrol costs are also inclusive of tax. One is the general sales tax (GST), currently, there is no GST on petroleum products, however, the IMF has proposed to reinstate 18% GST on petroleum products which will again cause fluctuation in the petrol price. A Petroleum Development Levy (PDL) is another tax that the government imposes on petroleum products. Through this tax, the government generates revenue. All these components together determine the cost that a common citizen has to pay for petrol. Consequently, if any of the above-mentioned factors undergo any change, there will be a very considerable variation in the price of petrol.
How Does the Petrol Rate in Pakistan Affect the Economy and Industrial Sector
The economy and the development of the country are very directly correlated with the price of oil. Every time there is an increase in the price of petrol, not only is the livelihood of a common citizen disturbed but the shock is also felt at a greater level than in the industrial and developmental sectors. Studies have shown that oil prices have impacted Pakistan’s GDP negatively in the long run.
Petroleum prices are costing the Government of Pakistan a lot in terms of development. When the international oil prices increase, so does our import bill increases, in turn, the domestic price of petroleum products. When the cost is increased domestically, production fees are increased which leads to higher rates of commodities, proportionally increasing the cost of living. Henceforth, there is a decline in productivity which causes a decline in consumption level leading to a decline in investment and economic growth.
It also impacts the Balance of Payments (BoP) and creates a gap between imports and exports. Import bill gets higher and exports are decreased because industries and manufacturing sectors are adversely impacted because of oil prices. The expenses and the transportation costs are increased which also results in the halting of infrastructure projects. High fuel costs have also lowered the per capita income of the country and have resulted in high inflation and increased electricity prices. This strained relationship of Pakistan with petroleum, along with some other factors, is the reason why we are still a developing and third-world nation.
Way Forward
First and foremost, Pakistan should get its own house to attract foreign direct investment (FDI) and measures should be taken to strengthen the value of the rupee. Secondly, new projects should be initiated to discover any new hydrocarbon resources and measures should be taken to maximize the use of already existing resources efficiently. According to TDAP, Pakistan can save U.S.D 923.3 million if we only import crude oil and refine it locally so efforts should be made to set up more oil refineries and update the machinery of the existing refineries so that they can be utilized up to their maximum potential.
Lastly and most importantly, Pakistan should look and invest in alternative power-producing mechanisms rather than depending on oil imports for power generation. Renewable energy resources like water, wind, solar and biomass should now replace oil. Not only these sources would be cheaper but also, they would produce clean energy almost free of GHG emissions.
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Hareem Amna graduated with a degree in applied psychology from GCUF and a post-graduation certification in clinical psychology from Kinnaird College. She is an aspiring writer focused on writing about current issues.
