This presentation analyses increase in price of oil in a decade 2000s in Pakistan and its repercussions for the economy with policy solution to minimize impact of future price increases.

1. 13 April 2013

2. National Institute of Management,
Islamabad
15th Midcareer Management Course
“Rise in Fuel Price and its Repercussions”
• Presented By: Muhammad Shahid Dayo (ExCadre)
• Sponsor DS: Raja Afshain Afzal
13 April 2013 2

3. Sequence of Presentation
 Statement of Problem
 Introduction
 Issues & Challenges
 Analysis
 Conclusion
 Recommendation
 Thanks/Q&A
13 April 2013 3

4. Statement of Problem
Since last one decade, Pakistan’s economy has
witnessed a persistently upward trend in fuel
prices. To understand the severity of problem it
is envisaged to identify and analyze issues and
challenges of rising fuel prices and their socio-
economic repercussions.
Based on the analysis, policy recommendations
will be offered to solve and/or to mitigate the
problem.
13 April 2013 4

5. Introduction (Cont’d)
 Fuels
 Chemical
 Nuclear fuels
13 April 2013 5
Primary (Natural) Secondary (Artificial)
Solid fuels wood, coal, peat, dung coke, charcoal
Liquid fuels petroleum diesel, gasolines,
kerosene, LPG, coal tar,
naphtha, ethanol
Gaseous fuels Natural gas hydrogen, propane, coal
gas, water gas, blast
furnace gas, CNG

6. Introduction
 Legal Framework
 Policy making by Federal Government
 Petroleum Policies by Ministry of P&NR.
 Policy Administration by OGRA under OGRA
Ordinance 2002
 Pricing of petroleum including petroleum surcharge
and petroleum levy under Petroleum Products
(Petroleum Development Levy) Ordinance, 1961
 Price administration under Section 6 of OGRA
Ordinance
13 April 2013 6

7. Issues & Challenges (Cont’d)
 Supply & Demand Imbalances
 Low oil reserves
 Low exploration
 Low refining capacity
 Low production
 Huge consumption
 Greater dependence on oil imports
 High vulnerability to world oil price shocks
 High domestic prices
13 April 2013 7

8. Issues & Challenges (Cont’d)
 Oil a Major Source of Energy
 High share of oil in energy mix
 Escalating power generation cost
 Rising price of electricity
 Tough times for major engines of economy;
 Industry
 Transport
 Agriculture
13 April 2013 8

9. Issues & Challenges (Cont’d)
 Oil Fueled Depreciation & Ineffective Monetary Policy
 High import bill
 Pressure of forex reserves
 Decline in rupee dollar parity
 Oil fueled inflation limits effectiveness of monetary policy
 Agriculture
 Rising cost of operating agricultural tube wells
 Transporting agricultural produce becoming expensive
 Rising cost
electricity/seed/implements/machinery/fertilizer.
 Agricultural imports flooding local market
13 April 2013
9

10. Issues & Challenges (Cont’d)
 Trade
 Increase in cost of industrial and agricultural
production driving export prices up
 Decline in demand for exports
 Competing countries capturing our export markets
 Imports outstrip exports in both volume and value
 Failure to compete in High Value Exports
 Chronic Trade deficits
 Unfavorable Terms of trade
 Dwindling forex reserves
13 April 2013 10

11. Issues & Challenges (Cont’d)
 Industry
 Increase in primary input costs
 Low profitability
 Dismal BMR investments by textile-the backbone
 Low value addition
 Low demand for exports
 Industries operate below capacity
 Low demand for Industrial credit hampers capacity
utilization/expansion
 Industrial output stagnates/declines
13 April 2013 11

12. Issues & Challenges (Cont’d)
 Fiscal
 Widening trade/current account deficits deepening BOP crisis
& increasing dependence on IMF
 Foreign debt accumulation and escalation in cost of servicing
 Rising circular debt
 Increase in domestic borrowing and cost of servicing
 Budget deficit
 Stagnant revenues, growing expenditure and soaring debt
servicing costs
 Govt in vicious debt trap: persistently borrow more to meet
previous debt obligations
 Relatively lower PSDP spending
 Low growth and poverty13 April 2013
12

13. Issues & Challenges (Cont’d)
 Employment
 Idle industrial capacity impedes employment
generation
 Industries losing export markets to other countries
 Factory workers face layoffs causing unemployment
 Fragile Investment Climate
 Investors avoiding exposure to long term investment
 Low growth in LSM
 Dried up FDI
 Growing Speculative Activities
 Booming bourses
13 April 2013 13

14. Issues & Challenges
 Growing social unrest
 Widespread protests
 Rampant Crime
 Violent tendencies
 Growing corruption
 High political uncertainty
 State’s orientation to profiting from fuel price hike
 Onslaught from judiciary, opposition and media
 Survival speculation
 Economic slump
13 April 2013 14

15. Analysis (Cont’d)
13 April 2013 15
Proven Oil Reserves 481 mn barrels
Oil Production 63,000 barrels/day
Oil Consumption 410,000 barrels/day
Net Imports 347,000 barrels/day
410000
63000
Oil Demand & Supply Gap (Barrels/day)
Daily Oil Consumption
Daily Oil production
Source: CIA World Fact Book

16. Analysis (Cont’d)
13 April 2013 16
$31
$41
$56
$66
$72
$100
$62
$79
$95 $94
$107
2002 2004 2006 2008 2010 2012 2014
World Crude Oil Price (US$ per barrel)
Data Source: ww.forecast-chart.com/forecast-crude-oil.html

17. Analysis (Cont’d)
13 April 2013 17
History 2011 Projections
0
50
100
150
200
250
1980 1990 2000 2020 2030 2040
Low Oil Price
Reference
High Oil Price
2010
History 2011 Projections
0
50
100
150
200
250
1980 1990 2000 2020 2030 2040
Low Oil Price
Reference
High Oil Price
2010
Source: US Energy Information Administration Department

18. Analysis (Cont’d)
13 April 2013 18
Source: PSO, OGRA and Daily Dawn
36.4
130.6
32.5
103.07
21.14
109.21
17.16
94.33
22.7
99.9
17.15
74.65
15
25
35
45
55
65
75
85
95
105
115
125
135
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Jan-
11
Jan-
12
Jan-
13
HOBC
Premium /
PG
HSD
LDO
SKO
CNG
Fuels Jan-03 Jan-13 Increase %
HOBC 36.4 130.6 358
Premium 32.5 103.07 317
HSD 21.14 109.21 516
LDO 17.16 94.33 550
SKO 22.7 99.9 440
CNG 17. 15 74.44 434

19. Analysis (Cont’d)
13 April 2013 19
3240400
12644000
7264700
2935525
2921868
9008980
6026611
1638457
318532
3635020
1238089
1297068
0
2000000
4000000
6000000
8000000
10000000
12000000
14000000
000 Kgs 000 M2 Tonnes Nos.
Cotton Yarn Cotton Cloth Fertilizer Motorcycles
No.ofMeasure
Items & Unit of Measure
Extent of Capacity Underutilization
Installed Capacity Capacity Utilization Unutilized Capacity
Source: Pakistan Economic Survey 2011-12

20. Analysis (Cont’d)
13 April 2013 20
29%
43%
1.30%
16.20%
10.40%
Energy Consumption by Source
(2010-11)
Oil
Gas
LPG
Electricity
Coal
1%
8%
0%
49%
40%
2%
Sectoral Consumption of Petroleum Products
(2011-12)
Households Industry Agriculture
Transport Power Other/Govt.
Source: Pakistan Economic Survey 2011-12

21. Analysis (Cont’d)
 Crude oil prices as a primary driver up by over 3 times
 Persistent rise in inflation
 Decline and stagnation in economic growth
13 April 2013 21
2.9
7.4
9.1 7.9 7.6
20.3
13.7 13.9
12.2
10.1 9
4.8 7.4 7.7
6.2 5.7
1.6
3.6 4.1 3.3 4.1 4.4
0
5
10
15
20
25
2002 2004 2006 2008 2010 2012 2014
Inflation and Economic Growth Rate in Pakistan
inflation Real GDP Growth Rate
Source: World Economic Situation & Prospects 2012 , UN

22. Analysis (Cont’d)
13 April 2013 22
10.8
9.5
10.1
5.5
0
2
4
6
8
10
12
Pakistan India Bangladesh Srilanka
YoYIncrease
Countries
Regional Countries Inflation (2012)
Source: Pakistan Economic Survey 2011-12

23. Analysis (Cont’d)
13 April 2013 23Source: Pakistan Economic Survey 2011-12
29 30 25 39 30 31 22 42 24 27 30 37 25 27 40 39
0
50
100
150
200
250
300
350
400
450
500
Price
Item
Essential Item Prices
2002-03 2011-12 Per year Increase %

24. Analysis (Cont’d)
13 April 2013 24
0
2
4
6
8
10
12
14
16
18
20
2008-09 2009-10 2010-11 2011-12
Percent
Years
Inflation by Consumer Groups
Upto Rs. 8000
Above 35000
Source: Pakistan Economic Survey 2011-12

25. Analysis (Cont’d)
602.39
238.77
699.99
482.50
16.20
102.08
0.00
100.00
200.00
300.00
400.00
500.00
600.00
700.00
800.00
Machinary & Transport
equipment
Mfg goods
Rs.Billion
Growth in Import of Consumer and Capital Goods
2007-08
2011-12
Growth (times)
13 April 2013 25Data Source: External Trade Statistics, PBS (2011-12)

26. Analysis (Cont’d)
13 April 2013 26
1196.64
897.88
75.03
2110.61
1487.99
70.50
-4.53
Primary/Semi Manufactured
Manufactured
Mfg Goods a %age of P/S Mfg Goods
Rs. Billion
Growth in Export of Primary & Manufactured Goods
Growth
2011-12
2007-08
Data Source: External Trade Statistics, PBS (2011-12)

27. Analysis (Cont’d)
13 April 2013 27
602.39
238.77 121.76 364.14
773.20
115.46
699.99
482.50 179.56
637.82
1420.17
228.73
0.00
500.00
1000.00
1500.00
2000.00
2500.00
Machinary &
Transport
equipment
Mfg goods Food & Live
Animals
Chemicals Fuels &
Lubricants
Animal/Veg
Oils & Fats
Rs.Billion
Import by Commodity Groups
2007-08 2011-12
Data Source: External Trade Statistics, PBS (2011-12)

28. Analysis (Cont’d)
 Another BOB crisis in the making
13 April 2013
import bill repayment Forex
Series1 -7.4 -1 7.2
-10
-8
-6
-4
-2
0
2
4
6
8
US$Billion
BOP Crisis
Sources: SBP’s latest Economic Statistics

29. Analysis (Cont’d)
13 April 2013 29
0
1
2
3
4
5
6
2007-08
2012-13
5.5
0.525
US$Billion
Dried up FDI
Source: Daily Dawn

30. Analysis (Cont’d)
13 April 2013 30
0
10
20
30
40
50
60
70
80
90
Price Effect Quantity Effect
%age
Sources of Changes in Petroleum Imports
(July-April 2011-12)
Sources: Pakistan Economic Survey 2011-12

31. Analysis(Cont’d)
13 April 2013 31
85877
9%
834911
91%
1358
No. of Diesel/Electric PoweredTubewells in
Pakistan
Electric Diesel Others
Per Hectare Irrigation Cost of Tubewell
Crop Electric
powered
Diesel
powered
Area
cultivated
by
Tubewell
Electric to
Diesel
Tubewell
ratio
Wheat 815 2150
6/19
million
hectares
1:10
Maize
710 2020
Sugarcane
2230 7245
Source: Sarhad J. Agric. Vol. 23, No. 1, 2007
Source: PBS 2011-12 Agri Statistics

32. Analysis
Pakistan Homicide Rate
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
6.2 6.5 6.2 6.1 6.2 6.1 6.2 6.4 7.2 7.3
13 April 2013 32
 NAB Chief revealed corruption of Rs. 10-12 billion a day
 Fuel hike led price instability and unchecked corruption
being major economic failures of government brought
government and judiciary on collision course sparking
political uncertainty which further compounded economic
problems.

33. Conclusion
 Rise in fuel prices has affected economy at both macro and micro
level. The major direct effects at macro level are deteriorating trade
balance due to higher import bill, reflecting a worsening terms of
trade; and a weakening fiscal balance. At micro level, investment
uncertainty results from higher risks of engaging in new projects
which slows down economic growth. The major indirect effects are
rising inflation which reduces household spending and disrupts long
term investment plans due to loss of competitiveness from higher
power generation and transport costs, leading to decreased
international competitiveness.
 Rising trend in fuel prices in our country is driven by international
oil prices, hence unavoidable. However, with a well thought out
short-medium-long term strategy focusing on mitigating risks of
future increases; achieving energy efficiency and conservation; and
diversifying energy mix, enhancing refining capacities, shoring up
exploration and production, the problem can be mitigated in the
short run and greatly solved in the long run.
13 April 2013 33

34. Recommendations (Cont’d)
 Short-medium term strategy
 The government should move from spot buying to hedge buying
of oil
 Medium-long term strategy
 Fuel conservation and Energy efficiency
 Electricity conservation by offering bulk consumers rebates on
reduced consumption
 Discouraging fuel guzzling vehicles by banning their
import/taxing heavily
 Vehicle fitness rules may be enforced to deter old vehicles.
 Restricting CNG to public transport
 Phased and targeted conversion of big office buildings
including government to solar power through enabling
legislation so as to penalize non compliers.
13 April 2013 34

35. Recommendations
 Medium-long term strategy
 Diversification of energy mix
 Blending ethanol in petrol
 Enhancing coal power
 Duty free import of quality coal for power generation by
industry
 Enhance exploration/production specially in Baluchistan
 Providing security to investors
 Giving guarantees to pay royalty to locals
 Training, educating and engaging local workers
 Promoting and incentivizing local investors/ consortium of
overseas Pakistani investors
 Enhancing refining capacity of existing refineries
 Regional integration with countries endowed with abundant oil
and gas
13 April 2013 35

36. Implementation Time Frame
13 April 2013 36
Developing &
prioritizing plans to
cope with future oil
price shocks so as to
contain domestic
fuel price increases
Short Term Medium Term Long Term
Hedge buying of oil
Energy efficiency/conservation
Diversification;
enhancing refining
capacity;
Increasing
exploration &
production

37. 13 April 2013 37