Oil risks to petroleum imports

Oil is heating up. So are Pakistan imports. But the bad news is that oil may just be warming up for a big rally, which some see going north of $100/bbl, as tensions grip the relevant market players. The US influence over Iran and then the trade pact with China – have both sent strong signals to international oil price. Combine it with Saudi’s desperation of the Aramco IPO at no less than $88/bbl – and you are in for a long haul.

Be very worried if you are or aspire to be Pakistan’s economic manager in the near future. All oil rallies do not last forever – this one too shall pass. But as fortune would have it, Pakistan’s current account is in the worst shape in recallable memory; reserves are down, debt up. And high oil price was the last thing anyone would have wished for. But it is here, and oil imports are not exactly very elastic.

A crude sensitivity analysis of oil price to oil imports suggest that oil at north of $65/bbl, could spell a yearly oil import bill of $14 billion. Oil has averaged $61/bbl in the first ten months of FY18, and the oil import bill is religiously marching towards $14 billion. It is already up 31 percent year-on-year, mostly owing to the 20 percent increase in crude oil price.

The 10-month oil imports were higher than this year in FY14, when oil averaged $109/bbl. It averaged 70 percent lower, but imports are only 6 percent lower from back then. This goes on to show that Pakistan is burning more fuel than ever before. Not that it is entirely wrong, but it still requires dollars to foot the bill.
Improved energy mix has led to reduced share of furnace oil in power generation. But, at the same time, Pakistan’s energy generation capacity has increased two folds from five years ago. Add the ever growing demand of LNG to the mix, in addition to the massive surge in transportation fuel – and the petroleum import quantities show no signs of receding.

Now is the time, Pakistan starts to supplement its power generation mix on more and more indigenous fuel. The base load has been formed to quite an extent, and now focusing on indigenous fuel would not hurt. Failure to do so will keep bringing Pakistan to this point, i.e. square one. And this, surely is far from ideal