Oil prices go up and down. Now gas prices are also linked with oil prices. While lower oil prices go unnoticed and without affecting the economies of the developing countries in a positive or significant way, higher oil and gas prices cause havoc — socially and economically. Pakistan has been affected much more badly because of an already high current account deficit and falling currency.
IEA (International Energy Agency) which coordinates energy issues of the OECD countries requires oil storage of three months consumption by the member countries which is largely abided. Although its purpose is to keep supplies at comfortable level, it also mildly tries to balance the prices. Early in this year (2022), IEA members did try to improve supplies by unloading storages in the market, with little success in affecting prices.
Supplier countries are organised mostly under the OPEC, which has been lately quite effective in maintaining high oil prices by keeping production low. It would be fair to say that oil producers suffered due to extremely low prices during the Covid as economies and demand went into sort of recession. Oil prices went as low as 10-20 USD/bbl. Full economic and social impact of high oil prices including in Pakistan have yet to be noted and felt. In Sri Lanka, for example, semi-anarchic situation has developed and the full assessment of economic losses and destruction has not been done.
Some people in Pakistan and elsewhere in the developing countries have argued for building oil and gas storages. There is some working oil storage capacity in Pakistan covering on the average 14 days of requirement, while the OGRA law requires 20 days of coverage. Although there is a case of expanding storage capacity, it is an expensive business. It requires capital investment for construction and working capital for the commodity. The costs are to be finally borne by the consumer.
It should also be noted that large storages are more common for crude oil. Producer countries store their extra production in consumer countries. A case in point is the UAE-India agreement in this respect. However, IEA storage requirement and maintenance of three months’ storage could not affect the prices in the recent days; it may cater to the strategic requirement assuring continued supplies during emergencies. In Pakistan and elsewhere in developing countries, strategic requirements may create demand for storages and some enhanced storage may be built eventually.
Hedging has been argued and tried in Pakistan as well. One of the last special assistants to prime minister (SAPMs) did try hard to install such a system. However, it was not found cost effective and had many risks. Hedging has been practiced by airlines to keep air tickets prices stable over the short term. Oil supply companies also indulge in hedging to be able to meet the contract prices in short-term contracts of less than one year.
Major oil prices’ rise and fall have been over a time cycle of 5-7 years, although it is difficult to predict points of inflexions with accuracy. As we have discussed, physical storage is costly and difficult. There is a greater feasibility of financial storage in the form of oil price fund. When oil prices go down, the savings may be deposited in an interest carrying fund. When the prices go up, these savings are utilized to fiancé the excessive prices. Although, the principle is simple, its actual mechanics of working may be complicated. Fund’s design can be developed. It can be a national fund or preferably an international fund focused on developing countries. National funds may not be implementable in Pakistan, at least.
Several deductions have been made earlier under various heads like Iqra surcharge on imports, but these end up in common pool, which means the amount so collected is spent on other heads to be not recovered. International agencies like the International Monetary Fund (IMF) and World Bank may not be required to dominate it and the fund should have larger influence and participation by China, Russia, South Korea and OPEC countries. The IMF and World Bank, however, have the intellectual and organisational resources to carry out this exercise.
Developed countries have a moral and political responsibility to pay some heed to the problem. Wars and conflicts are mostly created by them and the poor countries are mere spectators and suffer needlessly. From Vietnam to Russia-Ukraine conflict, it is all great power game. And additionally, the conflict is spread to economic sphere in the form of sanctions; Iraq, Venezuela, Iran and now Russia. It is good to see that news is pouring in that there may be some mechanism to allow flow of oil from Venezuela and Iran to ease the oil prices. In earlier times, diplomatic pressure on Middle Eastern countries used to be enough to maintain a low price oil regime; no more.
Expanding world economies are in the interest of all. It is not a zero-sum game. Market expansion is going to come from the developing world, while populations are stagnating in the advanced countries. Labour shortages are emerging in non-typical labour markets. Current behaviour of advanced countries is rather callous. There is no initiative and no consideration.
The IMF demanding unreasonable and abrupt increases in local energy prices in countries like Pakistan is a sure indicator. While there could be a case for requiring elimination of petroleum subsidies, it is absolutely ruthless and even destructive to require PLD and GST in an environment of ever-rising oil prices, of which nothing is certain. It may be good in the long run, but what about the short term? In the long run, it is said, we are all dead. It is in the short term that we all live and we have problems. So, it is hoped that some steps would be taken to alleviate the difficulties of the poor countries in meeting the abruptness in oil and gas prices.
As for Pakistan, the choices are limited. Pakistan has taken the bait of neo-liberal economic agenda for several decades; leave import substitution and ride the bandwagon of export development. Imports have climbed up while exports could not be expanded, causing current account deficit and currency devaluation issues which have exacerbated the energy price issue as well among others. Under such policies, reliance has been there on imported energy resources and development of local energy resources has been short shrifted.
Sufficient attention has not been given to the development of local oil and gas. Thar coal remains highly under-utilized, while imported coal power plants may be closed down if coal prices continue to remain high. A railway link project is required to bring Thar coal to the market outside the mines. The project remains to be approved and implemented. Thar coal gasification to convert it into gas and diesel, etc., has been talked about for quite some time now.
The international energy crisis has made the campaign against coal a bit milder. It may be the right time window to initiate these projects. Renewable energy can fill some gap at low cost. To be fair and balanced, renewable energy like wind and solar has become competitive only recently. Elsewhere, we have stressed the need of a fast track solar programme.
Hydro resources could have been developed more. Unfortunately, the installed hydro plants are giving lower output due to lack of water, adding to load-shedding. Hydros take inordinately long time to complete. Their water component adds to its critical role. LNG spot prices are very high; it is the term contracts which are somehow able to maintain lower average. Biogas and Bio-CNG have a reasonable potential of providing gas in reasonable quantity and at reasonable prices. Biogas projects can be implemented in less than a year. Scope for improvement and fast tracking is still there, at least in selected areas. Struggle should never end.
(The writer is former Member Energy Planning and author of several books on Pakistan’s energy sector)
Copyright Business Recorder, 2022