There seems be to no immediate halt to the bull run that oil is making in the global market as the Brent crude price crossed $122/bbl yesterday.
While oil marketing companies and refineries may enjoy the extended honeymoon period as it would swell their margins and profits by way of the likely increase in inventory gains, Pakistans economic managers face a tough call of a fattening oil import bill.
Petroleum products imports constitute nearly one-third of the total imports of Pakistan, and an increase in oil price as significant as the current one is bound to give them sleepless nights.
The demand of petroleum products is largely inelastic as history suggests that the quantity imported and oil price have a significantly low correlation of just 10 percent. Moreover, the circular debt still hangs over the energy sector, impeding the refineries ability to produce at optimum efficiency levels, which suggests that the demand for petroleum products will remain strong in the remaining fiscal year and the foreseeable future.
There seems to be a false sense of hope in some quarters that oil prices, after peaking to recent highs, will recede soon, just as they did back in 2008 - citing the price increase not driven by demand factors.
Little do they know that oil experts all over the world are of an entirely contrasting view - expecting oil to stay on the higher side for a longer run eventually settling at prices where they currently are - as supply disruptions will now demand a permanent premium.
How will the oil prices impact the trade deficit is of special interest as it may or may not have an effect on the currency depending on the magnitude of increase.
Assuming the quantity of oil imported for the remaining months of FY11 averages the corresponding period in the previous years - the oil import bill is set to rise, even if oil price averages $100/bbl during April-June (the chance of which appears remote). The yearly import bill is expected to cross $12 billion in the best case scenario of oil at $100/bbl. The oil import bill for July-Feb FY11 already stands at $7.2 billion - 15 percent up from the previous year as oil price has averaged $84/bbl for the period - an increase of 18 percent.
On the other extreme, if oil prices quickly take the Ahmadinejad route of $150/bbl, the oil import bill for FY11 could be a staggering $14 billion - a $4 billion jump from FY10 levels. The oil price may well hit $150/bbl, but the chances of it averaging the same for the remaining fiscal year appear slim.
A much safer bet is to assume that oil will average $120/bbl for April-June, which will take the oil import bill to $13 billion for FY11 (up from $10 billion in FY10) - averaging nearly half a billion dollar a month more during March-June against the corresponding period last year.
Wherever the oil prices eventually set in, the import bill in all likelihood would jump to higher levels. Arguably, the government cannot do much about the exogenous factors, but it would be best advised to look for ways to reduce dependency on oil when it comes to power generation - as hoping that oil prices will fall back to post-2008 levels of $30-40/bbl would not help the cause.
===========================
OIL PRICE SENSITIVITY
===========================
Oil import
Oil ($/bbl) bill ($ mn)
===========================
100 12,360
110 12,743
120 13,114
130 13,491
140 13,869
150 14,246
===========================
Source: BR Research, FBS