Recent key developments in Pakistan's oil sector underscore that there is always a need for the country to maintain its strategic oil reserves.
Shortages of the commodity became evident when COVID-19 started spreading around the world. The government could have made good use of the benefits of globally falling oil prices at that time. The Ministry of Energy had the option to import oil when prices were at rock-bottom and to balance the demand and supply protocols more competently.
Pakistan consumes about 350,000 barrels per day or some 0.35 percent of the world's entire consumption. At the point, when world oil prices had fallen drastically, there were reports that the Pakistan government was considering import of oil at those prices. However, it later seemed to have dropped the hedging move because it felt that oil prices would further dwindle. When oil prices did go further down, the government was taken over by inertia and did not buy any oil on the grounds that there was no extra oil storage capacity in the country. It was a fact that no oil marketing company had made any notable additions to its storage capacity in recent years. Had such capacity existed, the government could have taken the advantage of purchasing cheap oil in bulk quantities and storing it. It could have specially allocated foreign exchange for the purpose and then sold the oil strategically when the lockdown eased, and demand rose again.
It is true that like all other sectors, Covid-19 pandemic has tremendously affected oil consumption in Pakistan and around the world and has drastically curtailed all economic activity. Refineries have either shut down or are operating at throughput level. The fuels that have been most seriously hit are motor gasoline and jet fuel.
However, there is now some hope that consumption of various oil products will rise again as the Prime Minister of Pakistan has announced easing the COVID-19 lockdown restrictions across Pakistan gradually, starting May 9, 2020. PM Imran Khan has allowed small businesses and transport to be reopened so that economic activity could be partially revived. This also means that refineries will again boost their production capacity as consumption of motor gasoline and diesel will be restored.
There is also a paradox in Pakistan - sales of high-speed diesel (HSD) picked up in recent months (even before the full impact of COVID-19) due to the start of the Rabi crop harvesting season. Overall, however, sales of oil marketing companies had started decreasing. This was because FO (Furnace Oil) was being replaced by RLNG (Regasified Liquefied Natural Gas) and coal power. Diesel also had a reduced demand because economic activity had slowed down and had lessened transportation requirements.
The situation further aggravated with the influx of smuggled oil products. The reduction in demand for motor gasoline was also attributed to the fall in local motor vehicle manufacturing and a serious drop in their sales due to various reasons. The advent of Ramadan also curtailed most economic and industrial activity.
The world is now facing an oil glut in the backdrop of the widespread Covid-19 and despite significant oil production cuts by Saudi Arabia and Russia. What is the future of oil consumption around the world - and in Pakistan? It is generally felt that a lot will depend on how crude oil prices perform amid lockdown dynamics - the new norm that the world will now have to live with.
Though Pakistan is one of many countries struck by COVID-19, its government feels that economic activity must be revived for the nation to survive,. which is why lockdown measures have been eased. Many other nations have also similarly eased restrictions. Strict SOPs will be followed everywhere, including Pakistan.
Flight operations the world over are also easing and Pakistan is also contemplating the opening of some domestic routes. Even then, the impact will continue to be an adverse one on the consumption of jet fuel. Some fuels like HSD would continue to be in demand during the harvesting season and now, after the easing of the lockdown.
Major oil and gas service companies in Pakistan have started reducing their costs using different strategies. In the long run, one important solution to these issues would be to ensure deregulation of the petroleum sector. This will help speed up and address the supply chain issues, latest fuel standards for Petrol and Diesel and deregulating freight and margins. Deregulation will also address supply and demand issues and ensure that refineries invest in expansions and upgrades and OMCs continue to expand their storage and retail networks to meet the growing needs of the country. Deregulation would smooth over their costs and profit margins while ensuring that the kind of choked supply situation the country ran into does not happen again.
It needs to be considered that the government's attempts to control prices can also have devastating consequences because the government refuses to allow oil companies to set their own prices. One of the problem is that oil prices change on a day-to-day basis as does the price of the US dollar since oil prices the world over are in dollars while the price of oil in Pakistan is controlled by Ogra and changes are brought only once a month. It is for this reason that deregulation is important.
The coronavirus pandemic has helped create a perfect storm of negatives that could permanently depress all economic activity, and this includes the oil sector. What is now needed even more is deregulation of prices and privatization of assets. This would enhance transparency, enabling decision-makers to identify steps that require priority attention.
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