The Ripple Effects of Increasing Oil Prices

Author Name: Muhammad Mubashir Ehsan      09 Nov 2021     International Economy

Crude oil prices have risen by more than 50% over the last year, from USD 41.69 per barrel in 2020 to more than USD 80 in 2021. This recent spike in prices is, above all, the result of economic recovery after the COVID-19 pandemic. However, in this recovery context, it is crucial to recognize the increasing imbalance of impact between oil-exporting economies and oil-importing economies.

Historically, crude oil prices have been volatile during crises, be it the embargoes on oil shipments on countries supporting Israel during the Yom Kippur war in 1973 or the Iran-Iraq war in the late 1970s. Both these events restricted the supply of crude oil resulting in amplified global crude oil prices. Over the decades, Organization of the Petroleum Exporting Countries (OPEC) has influenced oil production. Recent evidence of this is the fourth quarter of 2021, when OPEC+ announced not to change current production targets that resulted in a further price jump in Brent (the major index).

Given the recent price changes, oil-importing countries are encountering a series of challenges, from widening the current account deficit to inflationary pressures. In Pakistan’s context, it is interesting to see that in 2008, global oil prices reached USD 147 per barrel, but it translated into the domestic price of USD 0.82 (PKR 62.80) per liter. In comparison, the current global oil prices are USD 62 per barrel less than in 2008, but it has a significant influence on the petroleum prices in Pakistan, reaching an all-time high at USD 0.79 (PKR 137.79) per liter. Similarly, our neighboring country India is also dependent on crude oil imports and is also experiencing the heat from increasing oil prices. In 2008, petrol price in India was at USD 1.14 (INR 45.56) per liter, and the current price stands at USD 1.44 (INR107.59) per liter. In layman’s terms, the value of these currencies has fallen, which has increased price sensitivity to any changes in global crude oil prices.

Amplified crude oil prices have also widened Pakistan’s current account deficit. In contrast, last September, Pakistan recorded a current account surplus of USD 865 million. According to recent estimates, in comparison with September 2020, there is an increase in the value of petroleum crude and petroleum products imports by USD 0.18 bn and USD 0.26 bn, respectively.

This global oil price increase has created inflationary pressures for emerging economies. It won’t be an understatement that changes in fuel prices have further burdened Pakistanis, having a ripple effect on all realms of their day-to-day activities. An example of this impact is the road transportation sector, where there is a high demand for petrol and diesel that plays a significant role in the expenditure patterns of individuals.

Even in these testing times, the government has the intention to provide relief to the public. According to the recent notifications from the Oil and Gas Regulatory Authority (ORGRA), the Petroleum Levy has been set at PKR 2.09, which is considerably low compared to previous notifications. It is important to understand that in the 2021-2022 budget’s annual target collection through Petroleum Levy is PKR 160 bn higher than last year. It will be a challenge for the government to generate higher revenue through the Petroleum Levy.

In the current situation, the government is facing immense pressure from the IMF, as it is dictating the terms for additional taxes to recover from the Petroleum Levy loss. As much as the government may desire to provide relief to the public, it has limited options. External influences have engulfed it to continue tighter policy measures. With increasing international commodity prices and the fall of the rupee, domestic policymakers have to ensure a right balance of monetary and fiscal policies.

Given the existing economic crisis in Pakistan, the Saudi government has announced depositing USD 3 billion cash in the State Bank of Pakistan and issuing USD 1.2b worth of oil on deferred payments. This will ‘help ease pressure’ on trade and foreign exchange accounts due to the global commodity price surge, according to Pakistan’s Minister for Energy.

The final verdict on the current situation is that oil-importing countries will have a net negative impact on their economies due to devaluation of their currencies, increasing current account deficits and soaring inflation. These countries need to transform their energy consumption to renewable resources to alter reliance on oil imports.

Muhammad Mubashir Ehsan is a researcher at the Centre for Aerospace & Security Studies, Islamabad, Pakistan. He can be contacted at cass.thinkers@gmail.com

Image Source:Oil: why higher prices will complicate the energy transition, March 20, 2021,https://theconversation.com/oil-why-higher-prices-will-complicate-the-energy-transition-157199

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