For decades, the cornerstone of Pakistan’s natural gas policy has been an unchallenged notion – the demand for natural gas is a one-way street. The price inelasticity of natural gas substantiates a system of heavy subsidies, resulting in an artificial economy around gas that is bound to collapse under its own weight.
The symptoms are all too familiar: depleting natural gas reserves, crippling circular debt, rampant gas theft, and an expensive reliance on imported LNG.
The empirical studies of the 1970s and 80s confirmed the old wisdom. Gas demand was profoundly inelastic. It made sense when gas was a new, abundant resource being rolled out to urban consumers.
But here is the policy paradox we face: the old notion is over. A clear trajectory, traced through decades of economic research, reveals a critical and overlooked truth – Pakistani consumers, from households to industries, have become price sensitive. Our policies, however, have not caught up. We are using a 1970s’ playbook for the 2025 crisis, and the result is economic hemorrhage.
Long-run price elasticities are no longer near zero; they are significantly elastic across all sectors. The message is unambiguous – when the price goes up, people find ways to consume less.
Yet, our policy framework operates in denial of this reality. The state-owned gas companies, like SNGPL, continue to be incentivized to build more infrastructure – laying pipes they get a return on, even if there is no gas to flow through them. This builds a permanent cost into the system for an asset that is often redundant. We are subsidizing a supply chain for a product we don’t have, funded by debt we cannot repay.
This creates a vicious cycle.
The more LNG we import to plug the shortage, the higher the average cost of gas becomes. To shield the public from this cost, the government absorbs the difference, fueling the circular debt inferno. But as the more recent literature proves, these price hikes are suppressing demand. We are taking on monumental debt to subsidise a commodity that people, out of sheer economic necessity, are already using less of. It is a fiscal nightmare.
The solution lies in accepting the new evidence and embracing a market-based approach. The goal must shift from subsidizing supply to managing demand.
First, we must let prices talk. A tiered pricing mechanism that reflects the true cost of gas, especially imported LNG, is no longer a political taboo; it is an economic imperative. Consumers will respond, industries will invest in efficient boilers, households will optimize their use, and the commercial sector will seek alternatives. To curb circular debt, this reduced demand is a sustainable way to lower the import bill.
Second, it is pertinent to target subsidies with a scalpel, not a shovel. The savings from eliminating blanket subsidies must be reallocated to those who need them most via targeted cash transfers, not cheap gas. This will promote energy efficiency by helping industries retrofit plants and supporting households in adopting efficient geysers and stoves.
Third, it is imperative to redefine the role of gas utilities. Their performance must be measured not by the length of pipeline constructed, but by the efficiency and financial health of the system they oversee. Their mandate should be to become administrators of a balanced gas network rather than builders of an empty grid.
The continued belief in the myth of inelastic demand is the single greatest obstacle to solving our gas crisis. The world has shown us how it’s done. The US shale revolution and Europe’s response to the Ukraine war prove that when the demand is elastic, the market adjusts. It is time to let the old dogma die and build a policy that is rational, responsive, and rooted in the economic reality of today, not the faded memory of yesterday.
Copyright Business Recorder, 2025
The writer is a Staff Economist at the Pakistan Institute of Development Economics (PIDE). He can be reached via Email at: bilalaftab@pide.org.pk