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Thursday, June 24, 2021

The Rise in Oil Prices

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The price of oil has been at a record high since the last few years. The simple explanation being that the demand for oil is increasing rapidly whereas the production is near capacity for several of the chief producers. In fact the ever increasing demand for oil threatens to surpass the world’s oil production. New oil fields and technologies being used have not given any satisfactory results. In fact they have failed not only to provide the expected supply growth but have also failed in relaxing the pressure on the oil industry. Supply of oil is further congested by the refining capacity which in turn triggers the premium on gasoline and jet fuel. This increment in the cost of these fuels adds to the cost of their constituents too.

As for Pakistan, for the past few years it has been following the technique of assessment of domestic oil value against the international oil value on a fortnight basis. About 85 percent of the oil required for domestic uses in Pakistan is imported. Back in the year 2004 various subsidies were given by the government on the oil price as an attempt to protect the citizens from the prospective record fuel costs. It was also an attempt to curb the rate of inflation prevalent in the country. Financing these subsidies, which by the way are considered a birthright by the population of these countries, is a major burden for an emerging economy. For instance according to the estimate of various prominent economists and analysts, that subsidy was costing Pakistan a whooping 14.5 billion rupees per month. This amounted to around $232 million per month. Not surprisingly as a result the Pakistani government was under major financial stress.

How far could have the Government continued to endure the fuel bills? Hence this stress being faced by the government is said to have been a significant factor for the hike in the oil prices. The inflation rate had already reached a record high in the 1st month of the current year accompanied by the increase in the consumer prices which leapt to an alarming rate of 11.9 percent as compared to the previous record rate released by the Federal Bureau of Statistics.

All these factors led to the first ever increase in the price of gasoline and diesel in Pakistan in almost twenty two months. This increase took place on the 1st of March 2008 against the last increase that was witnessed in 2006 in the month of May. The price at that time was raised by 4.2 percent. Before the current implementation of the increment in oil prices the nationwide price of gasoline was 53.7 rupees per liter whereas the price of diesel was 32.57 rupees per liter. The announcement regarding the increase in oil prices in Pakistan was made by The Oil and Gas Regulatory Authority. The new prices of gasoline and diesel were increased by 5 Pakistani rupees per liter and 3.5 Pakistani rupees per liter respectively. The new prices came into effect on 1st March.

This hike in the oil prices was expected and did not come as much of a surprise. The reason being that owing to the record prices of crude oil import, almost all the countries over the world had been increasing the price of gasoline. For e.g. In February the price of crude oil in the New York market was around $101.84 per barrel which was close to its record price of $103.05 of the previous week. Though as already mentioned the increase in the prices of oil and the oil related liquids was not unexpected but still it shocked the poorer class. The increase in price will eventually affect everybody regardless of their status but it will exclusively affect the salaried class and the underprivileged sections of the society more so than the others. The high income group will manage to survive and will not have to deviate from their average living standards. But the strain being faced by the poor will result in regional instability. The Pakistan economy which is already under extreme pressure will suffer as a whole. On one side it is being given intense competition by competitors like China and India and on the other side it has continuous internal problems owing to the current political chaos. A further increase in the oil prices is sure to put a heavier strain on the existing working units. But according to recent information, including the statement from the OPEC ministers it is speculated that the oil prices will remain firm in the months to come.

The economists are deeply concerned about the consequent effects of rise in oil prices on the global economy. In fact some of the top economic experts believe that if the upward trend continues in the price of oil then it might result in a kind of global disruption similar to the one witnessed in 1973. Hence the increase in the production of oil and the refining capacities are being called for by the analysts along with greater emphasis being laid on finding new exploration methods and curtailing the current oil consumption. Various methods are being adopted as an attempt to encourage and cut the consumption of oil for e.g. telecommuting, which involves working from home. Lowering the consumption of oil though is a difficult task but not entirely impossible. Further several alternative energy options namely the nuclear energy, solar power energy and the bio-diesel fuel are also being considered but they have several drawbacks.

The future prospects do not seem very encouraging either and therefore the customers are ready to pay any kind of price for the purchase of oil. Despite of the promises of OPEC to raise it’s out put, no significant steps have been taken in this regard. Prices of oil are lowered temporarily only to rise on a much higher value. If the current conditions prevail it is not long before the supply of oil in the international market at the rate of around $200.

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