PETROLEUM PRICES: IMPACT ON INDUSTRY

ContentsNo.

Topic

Page No.A)HYPOTHESIS

2

B)ANALYSIS

3

1.Consumption of Oil in Pakistan

4

2.Importance of Petroleum

5

3.Oil refining setting Oil Prices

6

4.New heights of Petroleum Prices

11

5.Reasons for the increase in The Petroleum Prices 12

6.Impact of fortnightly revision of Petrol Prices 13

7.Govt. to fix the disorder in Petroleum Prices 16

8. Measures taken by Govt. to reduce Oil Prices 17

C)CONCLUSIONS

20

HYPOTHESIS

Petrol Prices a major hurdle in the economic development of Pakistan.ANALYSIS

Definitions:

CNG

Compressed Natural Gas

FO

Furnace Oil / Fuel Oil

GOP

Government of Pakistan

HOBC

High Octane Blending Component

HSD

High Speed Diesel

LDO

Light Diesel Oil

MS 87Ron Motor Spirit (most commonly used petrol, Super)

OCAC

Oil Companies Advisory Committee

OMCs

Oil Marketing Companies

OPEC

Organization of Petroleum Exporting Countries

PARCO

Pak Arab Refinery

PDL

Petroleum Development Levy

PERAC

Petroleum Refining and Petrochemical Corporation

POL

Petroleum, Oil & Lubricants

ROE

Rate of Return

SKO

Kerosene Oil

IMPACT OF PETROELUM PRICES ON THE ECONOMY OF PAKISTAN1. CONSUMPTION OF OIL IN PAKISTAN

Pakistan, consumes over 400,000 barrels of oil per day. In Pakistan, petroleum imports represent 41 per cent of the country's primary energy supply, which consumed at least 30 per cent of our total export earnings. In real terms the price we have to pay for import of oil is roughly estimated $3 billion dollars. The demand for energy consumption so far grew at an average of 4.8 per cent in the last five years. Following graph shows the increase in consumption of POL (Petroleum, Oil and Lubricants) in last 21 years.

Annual POL Consumption in Pakistan (1980-2000)

Millions of metric tons

2. IMPORTANCE OF PETROLEUM

IN THE WORLD:

Petrol has a great importance throughout the world. With its increasing demand Petrol is considered a very important component of the economy, from the following point of views,

Firstly, it works as energy source; the world energy is based on petrol. There are some alternatives, but POL is one of the major sources.

Secondly, it is considered a very important source of revenue.

IN PAKISTAN:

Like other countries of the world petrol has significance in our economy. It is considered a major tool of economy and its consumption is also increasing day by day, which can be seen by the graph given above. Although it has a great significance in every sector but the major sectors are following:

In The Economy:

It is observed that oil is the backbone of every economy of a country. Thats why it has a big contribution in the countrys economy. Petrol carries a great importance in the economy of Pakistan, it is the main source of revenue for our country, and it has a big weight age in our budget.

In Industrial Sector:

It is observed that the Industrial Sector is based on petrol from direct and indirect manner. Some factories run through directly petrol and some run on electricity, which is produced through petrol.

In Transportation Sector:

One of the main usages of POL is in transportation sector. Because nearly all the vehicles used for transportation in the country run on petrol and diesel. So any shortage or stoppage of POL affect this sector badly.

In The Electricity Sector:

Petrol has a great significance in power producing sector. In Pakistan the main power-producing sector WAPDA (water and power development authority) is partially dependent on electricity sector, although it is not completely dependent. Dams are used to produce power but still petrol plays a clear role in the electricity sector.

In The Budget:

Petroleum is considered a very important element of the budget of Pakistan. It contains a major portion of budget, which is covered through taxes. Thats why the importance of POL in the economy cannot be neglected.

3. OIL REFINING SETTING OIL PRICESThe installed oil refining capacity in Pakistan has remained stagnant for many years in spite of increase in consumption of energy products. To meet the increasing domestic demand of energy products the country is dependent on imports. The industry experts attribute this to many factors including limited production of indigenous crude that too contains very high percentage of wax, the pricing formula, an acute shortage of capital required to build modern refining complex and establishment of large scale refineries in the Middle East and Singapore. While the refineries in the Middle East have the advantage of indigenous crude at very low price the refineries in Singapore enjoy the advantage of their scale of operation and efficiency. Pakistan enjoying very cordial relationship with the Middle Eastern countries continues to import bulk of its requirements from Kuwait and Saudi Arabia.

Local Oil Refineries:

As a result of getting cheap and guaranteed supply from the Middle East Pakistan was contended with the small refineries operating in the country. At present there are four refineries operating in the country. These are:

i. Attock Refinery (ARL):

ii. Dhodak Refinery:

iii. National Refinery (NRL):

iv. Pakistan Refinery (PRL):

With a total capacity to refine over 6.5 million tonnes of crude per annum. While ARL is wholly dependent on indigenous crude, NRL and PRL use both locally produced and imported crude and condensate. Dhodak only uses the condensate produced at Dhodak oil field. ARL is more than fifty years old and both NRL and PRL are over thirty years old whereas Dhodak has started operation in December 1994.

Scale Of Operation Of Refineries In Pakistan:

The scale of operation of refineries in Pakistan is very small and units are old. These units were established at relatively low capital expenditure and have nominal depreciation expense and are therefore able to survive. The government has guaranteed a minimum rate of return on equity. However, in order to attract fresh investment in the refining sector it is necessary that ROE of the new refineries should be comparable to that being earned in other countries of the region.

Table on the next page shows the local

crude production from oil refineries:

Local Crude Production(US barrels) YearQuantityDaily Average

1995-9621,062,99557,549

1994-9519,857,87754,405

1993-9420,674,57656,643

1992-9321,895,39659,987

1991-9222,468,73961,396

1990-9123,487,44664,349

Foreign Investors in Oil Refining:

The sort of incentives a foreign investor in oil refining industry in Pakistan is looking for is evident from the proposal submitted by Supaveri Finance and Holding Company of Liechtenstein to the Board of Investment. They want to establish a refinery with a capacity to refine 7 million tonnes of crude per annum at a total cost of nearly 2 billion dollars. Their demands include:

Exemption from payment of all taxes plus turn over tax, stamp duty octroi etc.

Exemption from payment of import duty and all other surcharges on cars, buses, and wagon imported for foreign executives.

A suitable plot with developed infrastructure at concessional price.

Full security to all those working for the project.

Grant of permission from all respective agencies on priority.

Waiver of the condition of 80:20 debt equity ratios.

Guaranteed minimum rate of return on investment @ 25% on net equity in US dollars.

Guarantee from the government to buy-back the total production.

These are not new demands. The petroleum policy announced by the government in 1994 already provides many such incentives for the refining industry. However, it is expected that the present government will shortly announce a revised petroleum policy and some of the outstanding issues will be tackled appropriately.

It will not be out of context to mention here that initially there were four projects under consideration, but none has reached the stage of financial close. The government has extended the period for financial close but industry experts say that except one, no other will be able to reach the financial close and therefore the prospects for establishment of these refineries are bleak. Table on the next page shows the crude import of the country:

Crude importYearQuantity (Tonnes)Value (Million US$)

1995-964,230,820538.02

1994-953,867,975490.60

1993-944,191,804457.77

1992-933,998,127526.99

1991-924,047,965542.97

1990-913,972,544633.49

The following table shows the Energy product imports(Tonnes)1995-961994-951993-941992-931991-921990-91

100/LL NilNil2,4451,2921,5593,181

HOBC 3,937Nil52,16788,97281,956120,336

Kerosene 87,855145,389118,767163,70255,745416,826

HSD 5,093,5884,485,3424,377,0683,909,9523,312,5942,631,191

Furnace oil 4,748,8923,865,4363,243,9992,447,7191,823,3701,138,494

Motor spirit 106,122156,98856,094NilNilNil

MTBE 94,49983,70759,550NilNilNil

Total 10,134,8938,736,8627,910,0906,611,6375,275,2244,310,028

Local Investment In Oil Refining:

Pakistan State Oil (PSO) is setting up a refinery as a joint venture with Kuwait and Korea in Sindh at Badin. It will have an annual refining capacity of 4.8 million tonnes and will be capable of processing waxy crude produced in the region. The estimated cost of the project is US$ 800 million.

Pak Arab Refinery (PARCO) is a joint venture between Pakistan and Abu Dhabi with a designed capacity to process 100,000 barrels a day. It will be located near Multan. The estimated project cost is US$ 760 million. This will be an execution of unfinished agenda of the sponsors. PARCO had a plan to lay down a pipeline from Karachi to Multan and establish a mid-country refinery. However, after completion of pipeline project the sponsors decided not to establish the refinery.

Pak Iran Refinery is a joint venture between State Petroleum Refining and Petrochemical Corporation (PERAC) of Pakistan and National Iranian Oil Company. It will have a designed refining capacity of 6 million tonnes of crude per annum. It will be located at Khalifa Point near Hub in Balochistan. The estimated project cost is US$ 1.2 billion. At present no infrastructure exists at Khalifa Point. For the provision of infrastructure additional investment will be required.

The fourth refinery a joint venture between Schon group of Pakistan and Hobbs Bannerman of the US may not become a reality. The proposed capacity of this refinery was 1.5 million tonnes per annum and the estimated project cost was US$ 300 million. The US Export Import Bank has stopped processing of a loan application for the refinery because of some irregularities. It was found by the bank that a kickback of US$ 50 million was taken by the sponsors and the refinery was not only second hand but also not according to the specifications provided in the loan application.

PARCO seems to enjoy the highest probability of becoming a reality as Abu Dhabi government is serious about the project. However, the financial close has been delayed mainly because the government of Pakistan wanted to off-load its shareholding in the company. The ground is almost ready for transfer of government of Pakistan's share to the Middle Eastern counterpart.

Oil refineries production(Energy products only)

(Tonnes)1995-961994-951993-941992-931991-921990-91

Aviation fuels585,149526,577567,461572,299559,362517,844

HOBC62,15657,18270,07271,003119,154105,884

Kerosene506,748463,281487,774511,309480,087531,483

HSD1,439,8021,349,8221,442,1781,359,3321,438,8841,448,299

LDO253,917265,210318,740289,089279,696277,159

Furnace oil1,916,3871,721,8681,878,2901,796,8412,014,8802,093,778

Motor spirit968,814865,3261928,320959,555873,708820,331

Naphtha 104,596147,523108,27198,927150,636195,889

LPG 36,13036,84440,32636,05644,81844,973

Total 5,873,6995,434,2335,841,4325,694,4115,961,2256,035,640

Need For A Refinery:

The need for a mid-country refinery has been felt for a long time. In the northern part of the country only ARL has been in operation where the refining of crude has virtually gone down. Dhodak is too small a refinery and therefore the POL products refined at Karachi as well as imported one have to be transported to upcountry.

The Punjab province, having the largest population, has the highest consumption of energy products. The products have to be transported to NWFP and Balochistan. This creates not only logistic problems but the government spends over Rs. 3 billion annually towards freight charges. Government bears the freight cost to keep the prices of POL products uniform throughout the country even at the remotest places.

To improve the transportation of energy products to upcountry a solution was found in the shape of a white oil pipeline from Karachi to Multan. This project is also sponsored by PARCO. After the completion of the proposed pipeline the existing pipeline, which has been extended up to Lahore will be used exclusively for the transfer of crude mainly for PARCO's proposed refinery.

While Pak Iran Refinery has the financial support of the Iranian government which has also promised supply of crude and the sponsors are really not worried about the rate of return the project may be delayed for a long time due to pressure from the US government.

The refinery planned by PSO has support from other oil marketing companies and Kuwait and Korean plant supplier, Hyundai. All the participants are serious about the project; the only insurmountable obstacle is the assurance about rate of return on equity. While the government of Pakistan has guaranteed minimum 25% rate of return on paid-up capital, in rupee terms, for new refineries for the first eight years, if sponsors offer a definite logistic advantage and the refinery is set up by the year 2000, the sponsors are still insisting on 25% return in dollar terms. This debate has caused delay in achieving financial close of PSO refinery but also all other projects.

A data about production of crude oil in Pakistan indicates that the level of output has actually gone down over the years from 64,349 barrels in 1990-91 to 57,549 barrels in 1995-96. This was mainly due to lower production at oilfields operated by Occidental of Pakistan. While the production by Oil & Gas Development Corporation and Union Texas Pakistan has increased production by Pakistan Petroleum after touching 2,804 barrels in 1992-93 has reduced gradually. Crude production of Pakistan Oil Fields has also registered marginal reduction.

For the present situation and heavy dependence on imports only policy planners of the country are to be blamed. The policies, which could attract foreign investment in oil and gas exploration sector, were missing. This kept the exploration activities in the country at a disappointing level. The first exploratory well was drilled as back as in 1867 in the region but only 420 wells were drilled during last 50 years after independence. Out of these 123 wells were drilled during July 1990 to June 1996. There were 50 oil and 62 gas discoveries during the period. The overall success rate comes to 1:3.8.

In the absence of sufficient availability of indigenous crude the proposal of establishing a refinery in the country has to be weighed against import of finished products. Looking at the Pakistan's relationship with the Middle Eastern countries the opinion is divided. One group believes that since the market size is small establishment of even a medium scale refinery will not be feasible. Whereas the other group believes the country must be self-sufficient in energy supply. Oil still meets nearly 43% of the energy requirement of the country. Whereas about 36% requirement is met through gas, while 14.3% is met by hydel electricity. LPG, coal, and nuclear power meet the balance.

Importance Of Oil:

In this context the importance of oil is high in the country. The demand for POL imports has been increasing constantly. The quantum of import has increased because of government's decision not to allow use of gas in cement industry and for power generation particularly in the private power plants. It is estimated that import of furnace oil alone will cost over 1.5 billion dollars in the current financial year.4. NEW HEIGHTS OF PETROLEUM PRICES

The latest fortnightly revision of petroleum prices has pushed the retail prices of petroleum to new heights, on 16th of March 2003. The retail price of motor gasoline, the most used variety of petroleum, registered a sharp increase of 3.83 per cent to Rs 37.11 per liter. The price of High Speed Diesel went up by 3.47 per cent to Rs 25.93 while the prices of kerosene oil, high octane and light diesel also registered a sharp increase. The consumer is paying 37.19 per liter for petrol whereas the OCAC has announced Rs. 37.11 per liter the 8 paisa increase is the petrol pump commission. On March 31 OCAC announced new fortnightly reviewed POL prices, which were decreased due to decrease in international market. Following table shows the past prices of POL set by OCAC in Rupees.

Past POL prices set by OCAC every fortnight.

MS 87 RonHOBCSKOHSD

Feb 2, 200332.9636.8321.3218.30

Feb 1634.5138.4122.9019.58

March 235.7439.6523.1725.06

March 1637.1941.1124.6226.01

March 3133.3637.4121.1524.62

April 1530.6734.6919.1121.62

May 130.5534.5718.9921.5

The following graph shows the graphical presentation of POL in last few months.

Following graph shows the price of MS 87 Ron (most commonly used petrol) settled by OCAC in last few months of 2003.

MS 87 Ron (Super Petrol) prices set by OCAC in last few months

5. REASONS FOR THE INCREASE IN THE PETROLEUM PRICES

Deregulation & OCAC:

The process of deregulation initiated by the present government has already eliminated the involvement of the government in lubricants, import and pricing of various segments of the oil sector. The intention of the government to deregulate the import of High Speed Diesel (HSD) is yet another major step to bring private sector in the business. For the lubricants, import and pricing of various segments of the oil sector a committee is established last year called Oil Companies Advisory Committee (OCAC). The Government is taking its share in the form of Government levies i.e. excise duty and Petroleum Development Levy (PDL). Now the situation is in the hands of OCAC. OCAC review the petrol prices after every fortnight (two weeks). According to OCAC there are five basic elements, which constitute the consumer prices of petroleum products in Pakistan, which are following.

a) Government Levies (Excise duty and PDL).b) Ex-refinery Price. c) Inland Freight.d) Distributor and Dealer margins.e) Sales tax.a) Government Levies (Excise Duty And PDL):

The government is charging excise duty and petroleum development surcharge of Rs12.87 per liter on petrol. On diesel, it is Rs2.76 per liter representing PDL only. The government levies are the prerogative of the government, the OCAC paper says, and hence are fixed in accordance with the needs of the government. Petroleum products are an important source of any government's revenue.

Market analysts and consumers have developed a wrong practice to link the international crude oil prices with the trend of petroleum product prices in Pakistan. Indeed this is a reasonable indicator but often tends to distort results. The most appropriate to compare trends in prices with local the consumer prices in Pakistan is the Arab Gulf region as Pakistan is situated in close proximity to the Middle East region.

According to OCAC the product prices fluctuate based on the demand and supply situation and the differential between FOB price of crude oil and product prices represents the refiners/traders margin.

b) Inland Freight:

Freight is another important factor. Crude oil is transported in tankers usually called "dirty tankers" while finished products are transported in tankers called "clean tankers." The freight for products is, therefore, substantially higher than that of crude oil

c) Ex-refinery Price:

The ex-refinery price of a product, which is paid to the local refineries, equates to the landed cost of the product. It relates to the import parity price of the product if the same were to be imported. The base price relates to the relevant products FOB price averaged for the fortnight as quoted in the Arab Gulf region to which are added other elements like freight, letter of credit (L/C) and bank charges. Wharf age arrives at the refinery price.

d) Distributor And Dealer Margins:

The government also fixes the distributor and dealer margins, which represent the profit element for the oil marketing company and their dealers. These margins are represented as a percentage of the fixed sale price. Till February 2002, the margins were 2 per cent and 3 per cent respectively for the OMCs and dealers when they were revised to 3 and 3.5 per cent. From July 2002, these have been fixed at 3.5 per cent for OMCs and 4 per cent for dealers.

e) Sales Tax: A 15 percent sales tax is calculated in consumer pricing and this varies in accordance with the movement in the price of various products based on the FOB value and the rupee/dollar parity.

US-Iraq Conflict:

As a result of disturbed conditions, due to US-Iraq conflict, the sustainable supply at normal price always remains under threat. On one hand sustainable supply of oil remains vulnerable while on the other hand the importing country has to pay more whenever the prices shot up in the world market. This situation becomes more painful for a country like Pakistan, which has enormous energy resources and ample scope for discovering more resources within the country.

The problem of Iraq is one of the major element with oil prices in the international market and some how in Pakistan. But if we totally consider the issue of oil with Iraq crises in Pakistan, then it will not be a good analysis. We can give only 10% weight age to the Iraq crisis, because Pakistan nearly exports all of its oil from Saudi Arabia (at very confessional rate) and other Gulf countries.

Oil as Revenue Collecting Tool:

On finding the reason for rising petroleum prices, it is observed that the international prices of oil have to do less with the rising petroleum prices in the country. It has to do more with the heavy taxation and levies that petroleum and petroleum products are subjected to help the government collect more revenues, an opportunity which no other product or good offers.

It is observed that the total incidence of taxes on petroleum and petroleum products adds up between 55-60 per cent of which 40 per cent is in the form of indirect taxes and the remaining comprise of such direct taxes as sales tax. The massive usage has made petroleum as ultimate revenue collecting tool for the government because it offers tax collecting potential which no other product or good offer. The infatuation with petroleum as the premier revenue collecting tool by the successive governments, including the one in power today, has resulted in pushing the prices to the record highs at present long before the Oil Companies Advisory Committee was established last year to review the prices every fortnight (two weeks).

Lack Of Policy Making:

Lack of policy making in Pakistan is one of the major reasons of rising prices of POL in Pakistan. It can be seen that, in international market during the year, oil prices increased about 20%. But with that value of rupee increase 10% as compared to dollar. So according to that oil prices should increase only 10%in Pakistan. But during the last 14 weeks, it increases about 20%-25%. And the gain strength of rupee is not passed on consumer.

Actually government has closed her eyes on the problem; she just sees that tax is coming in its exchequer. She is not planning for the solution of the problem rather she is worried about that what will happen in future and on which extent we will increase the price to cover all type of deficit.

Major Participation In Budget:

Petrol is a major contributor of the budget, it is estimated that:

In the budget of June 2002, it contains 39 billions of the total budget.

In the budget of june2003, it will collect 45 billions of the total budget.

So government increases 6 billion on it. And simply it meets through an increase in prices.

6. IMPACT OF FORTNIGHTLY REVISION OF PETROLEUM PRICES

Business and Industry

The latest fortnightly revision of petroleum prices pushing the retail prices of petroleum to new heights on 16th of March 2003 has drawn sharp reaction from the business, trade and industry. The reaction to the record petroleum prices threatens to increase production, transportation costs as well as steep rise in a prices of raw materials used in the manufacturing of goods in the country.

Sources within the industry expressed apprehensions that the increase would have a serious impact on the exports by pushing their prices to render them in competitive in the international market. The incessant (continuing) increases in petroleum prices have pushed the production and shipment costs, which can be a blow to the industry, particularly the export-oriented ones.

PIA:

The national flag carrier Pakistan International Airline (PIA) has already levied a Rs 5 fuel surcharge on every kilogram of exports.

Raw Material:

Rising petroleum prices have also pushed prices of many raw materials. For instance, the price of the polyester fiber has risen from Rs 55 per kilo to Rs 75 per kilo depicting a sharp increase of almost 37 per cent, an unaffordable increase indeed. Rising petroleum prices is the single most important factor to push the price of polyester fiber whose manufacture requires high quantity of petroleum.

Transportation Sector:

This is the first important sector, which is directly linked with oil. The major input used in this sector is oil. So any increment in oil prices affects transportation cost which result, in increase in prices of transportation. And the products, which effects from rising in transportation cost are daily consumer products. Which then affect consumer and the consumer has to bare not only the increasing prices of oil but also the increasing prices of daily consuming products.

Normal Consumer:

Normal consumer effect through the prices of POL directly and indirectly in a very bad manner. In direct manner they effect through the prices when they use their own transport. The following chart will help to explain.

Power Producing Plants:

Electricity producing sector like WAPDA is also affected due to this increasing factor. Due to this increment WAPDA is requiring government to increase the electricity tariff by 40 paisa/unit, other wise be ready to provide 17billions from non-tariff sector.

Agricultural Sector:

Petrol prices also affect agriculture sector very badly. In agriculture sector petrol is mainly used in tractors, tube wells and other agricultural machinery. Thats why whenever POL prices are increased or decreased they affect the cost of agriculture products, which result in increase or decrease in the prices of agricultural products.

7. GOVT. TO FIX THE DISORDER IN PETROLEUM PRICESReducing Taxes:

High taxes and levies provide the government with workable choices to absorb any losses if it chooses to reduce the taxes to give the much-needed relief at present. The government should absorb any loss of revenue without passing it to the consumers for the greater interest of the industry and people. The prevalent unemployment and problems faced by the industry amidst (in the middle of) the situation in Iraq make it all the more necessary to absorb it because we are passing through an extraordinary phase.

Fixing Petroleum Prices For Next Few Months:

This extraordinary situation necessitates that the government should fix the petroleum and products for the next few months until situation stabilizes, if not normalizes, in the region. Extraordinary situation demands extraordinary solutions and fixing the petroleum prices would not be hard as our foreign exchange reserves have crossed $ 10 billion mark and the economic situation also looks promising.

Fixing the petroleum prices would help arrest rising costs of production as well as prices of raw materials needed by the export-oriented industry to let exports maintain competitive edge in the international markets. This is particularly true for cotton and textiles, the biggest foreign exchange earner for the country, which is the biggest consumer of polyester fiber, the price of which has risen sharply to undermine the exports. It is all the more necessary as foreign buyers have put textile orders on hold due to the war in Iraq, a situation that did not happen even after 11 September.

Ministry Of Petroleum Policy:

Ministry of petroleum recently submitted a formula in high court to control the prices. They said that government should fix the tax on petrol and its product. Instead of stabilize cost of these strategic products. Because according to calculation every addition bring more than half in coffers. They also give the suggestion that government should adopt a strategy of rising prices in a constant manner.

To Find Other Sources To Collect Revenue:

More over that government should not consider oil as its primary tool of controlling its any shortfall and budget deficit. Government should strong its economy depth wise and tries to reduce the dependence from it.

Increasing Reserves:

A very good suggestion to control the process is that the government should try to increase the reserves in the country. Because if the country has reserve for nearly 6 months or 1 year then the country will be in a condition to cope with the contingency factors efficiently.

Relations With Gulf Region:

Pakistan should adopt a policy to make business relations with gulf region and introduce local products in the region, so that Pakistan can get petrol at reasonable prices.

7. MEASURES TAKEN BY THE GOVT. TO REDUCE OIL PRICES

Suspension of Duties and Taxes:

The experts are urging the government to suspend all levies and taxes on petroleum for next 2-3 months until the oil prices stabilize. Of course the government would loose revenue the cushion it enjoys makes it possible for it to absorb the resultant revenue loss. The short-term loss would actually be a long-term gain for the government as shedding of value by the dollar, increasing prices of local inputs like cotton and rising production costs would otherwise render a range of exports in competitive in the international markets. As is, the prices of textile exports from Pakistan have already registered an average decline of 10-15 per cent and even more in many cases. The suspension of levies and taxes on petroleum is a must to keep Pakistani exports competitive without which they would loose places in the international markets."

Oil Substitutes:

The option for the economic manager is to improve the available energy resources within the country or to find oil substitutes that obviously can be natural gas or utilization of plentiful coal reserves so far untapped in Pakistan. Working on these lines, the government has already indicated to shift power generating sector and other oil consuming industries either on natural gas or on coal. Steps however have been initiated to stop import of fuel oil completely within a year or two by switching over the oil consuming industrial units from oil to gas or coal. A major portion of the cement units and power generation has already been shifted to coal-fired and gas fired system respectively.

According to the estimate Pakistan can save 600-700millions in a year if it converts the power generation sector from furnace oil to local gas. According to an estimate Pakistan has nearly 164.25billion tons of coal reserve.

On Viability Of Switching To Other Substitutes:

China and India are turning to natural gas for long-term energy security after crude oil prices tripled in less than two years to their highest level in almost a decade. The Thais are harnessing energy from other natural sources such as the sun and wind (Ibid.).

HYPERLINK "http://www.scholars.nus.edu.sg/sep/students/oilcrisis/graph14.jpg"

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The above examples illustrate the use of other energy sources besides crude oil. It also goes to show that oil is not all that indispensable --- it can be substituted with alternatives. This price hike has caused many people to explore other means of energy; solar energy being the most favored one. Unlike burning crude oil, use of solar energy minimizes negative externalities such as pollution. But substituting oil to other forms of energy do not come cheap, which is why oil is still the prevalent energy of the day. Only with substantial high oil price will it be economically viable (beneficial) to switch to other energy forms. Diagrammatically, this can be shown again as a shift in MB curve for production to take place.

Conservation revisited:

Economics is all about using limited resources to satisfy unlimited ones. The concept is aptly applied in the idea of oil conservation: reduce the depletion rate of finite and diminishing fossil fuel reserves, particularly oil reserves.

Before this year, many industrialized countries took the availability of a steady supply of cheap oil for granted. The current rise in world crude prices has brought energy conservation seriously into focus. The major industrial nations have been lowering the energy intensity in their economies since the 1970's. Oil consumption has decreased by some 40% since 1973 but the consumption of petrol has actually increased (Ibid.). Because of its efficiency, energy conservation has been dubbed as the "fifth fuel".

Graphically, conservation of oil can be interpreted as a leftwards shift in the demand curve. Since equilibrium quantity with conservation is less than that without, oil will be used up at a slower rate, that is, conservation helps in lengthening the life span of crude oil.

Production of Oil from Local Resources:

However, apart from hectic efforts so far made to explore oil within the country, the total production of oil from local resources has not touched even one forth of the total oil requirement. With the new discovery of oil resources in Sindh, Pakistan's indigenous crude production is approximately around 60,000 barrel per day out of which some 5000 barrels are exported. Our total proved reserves are estimated around 275 million barrels. The crude import requirement is currently about 150,000 barrels a day. Although country is rich in natural resources and has the capacity to become self-sufficient in energy, however under the given circumstances it seems hard to predict how long it would take to attain that position when our dependence on imported energy is done away with.

It is unfortunate that the access to the oil potential blocks especially in the province of Balochistan is a major obstacle for the oil exploring companies due to large area in that tribal area is under force majeure and the tribal chiefs are creating obstacles in reaching the available opportunities.

Future Threats:

Pakistan has several threats behind the Iraq crises; one of them is that Saudi Arabia can short the quantity of its supply. Which can create a lot of problem in the country. As America has nearly captured Iraq, so the question is, what will happen if America cut supply of oil to other countries? In this way Pakistan will effect indirectly. When oil supply will cut off from Iraq, other countries will meet its demand from importing oil from Saudi Arabia and other Gulf countries and as a result Pakistan will fail to import it at confessional rates, so oil prices will increase at the end.

CONCLUSIONS

It thus appears that an oil crisis is unlikely anywhere in the near future despite the current surge in oil price. Current oil price is also not as bad as perceived to be because of all the inherent advantages that accompanies. This is however not to say that we can rest on our laurels. A recession might not be forthcoming from an oil shock but from other sources as simple as collapse of business confidence. We do not want to be caught unprepared in a recession, so be warned.

Oil Prices

Consumer

Effect

Directly

Power

Transport

Industry

Indirectly

PAGE 20

_1111939330.xlsChart2

32.9636.8321.3118.3

34.5138.4122.919.58

35.7439.6523.1725.06

37.1941.1124.6226.01

33.3637.4121.1524.62

MS87RON

HOBC

SKO

HSD

Sheet1

OIL NAMEMS87RONHOBCSKOHSD

2-Feb32.9636.8321.3118.3

16-Feb34.5138.4122.919.58

2-Mar35.7439.6523.1725.06

16-Mar37.1941.1124.6226.01

31-Mar33.3637.4121.1524.62

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0000

0000

0000

0000

0000

MS87RON

HOBC

SKO

HSD

Sheet2

Sheet3

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4.9

5

5.7

5.9

6.1

7

7.2

8

9

9.8

10.5

11

12

13

13.9

15.5

16

17

16.5

18

18

Million

Sheet1

198019811982198319841985198619871988198919901991199219931994199519961997199819992000

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0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

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0

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32.96

34.51

35.74

37.19

33.36

MS 87 Ron

Rupees

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2-Feb16-Feb2-Mar16-Mar31-Mar

MS 87 Ron32.9634.5135.7437.1933.36

Sheet1

0

0

0

0

0

MS 87 Ron

Rupees

Sheet2

Sheet3