The command that
oil holds over the global economy was evident in 1973, when oil
producing Arab nations restricted oil sales during the Yom Kippur war, thus
resulting in oil prices quadrupling. Thus, the recent oil market
crash leading to a 70% decline in oil prices from $70 per barrel to
$20 per barrel is a cause for concern for a few while others, like Pakistan,
breathe a sigh of relief. But in order to understand the ramifications of
falling oil prices it is imperative that one grasps exactly how the oil
market has been functioning for the past few years.
The oil producing nations are
currently burning their currency reserves. This will impact their domestic
politics and will affect the plethora of Pakistani labourers currently working
in GCC countries and sending remittances back to Pakistan. America’s energy
industry is also facing massive unemployment since most of the energy producers
are incurring losses at the current oil prices. Russia, however, is relatively
shielded because of its flexible currency and a lower budget break-even rate.
Global oil demand will not recover unless the global lockdowns are lifted by
June or July. The long term fair value of oil prices is now somewhere between
$35-$40 per barrel. Hence, energy importing nations like South Korea,
Turkey, India, Pakistan, Philippines and Bangladesh could reap the benefits of
falling oil prices.
The fall in oil prices could
lead to a reduction in electricity prices (if capacity payments are
excluded), an increase in business profit margins, a lower inflation outlook,
falling interest rates, cheaper air-fare and stagnant, if not falling, prices
of food and other basic commodities. The government of Pakistan could
benefit from lower imports, a stable Pak Rupee, higher foreign exchange
reserves, lower financial costs, higher economic growth, and better employment
opportunities and, eventually, an improvement in Pakistan’s geo-political
standing. However, declining tax revenues should be off-set by a higher tax
percentage on petroleum products as long as it is used for productivity
enhancing human capital developments in the education and healthcare sector.
However, as stated earlier, there
will be a decline in foreign remittances coming in from the Middle East, which
is a blow to Pakistan. There will also be an increased downward pressure on
Pakistan’s exports (due to the anemic economic growth worldwide), and reduced
expenditures on oil imports (which will have a beneficial impact on Pakistan’s
current account). As a result, the reduced inflation will also benefit the
purchasing power of consumers, but not by much. The government should have
a bottom range in mind after which the relief might not be entirely passed on.
Petrol
prices in India, China and Turkey are much higher than they are
in Pakistan. This is significant since previously China and other countries
kept $40 per barrel as the threshold amount, hence, oil prices should revert
back to $35-$45 per barrel once the global lockdown’s intensity
reduces. But the current situation could prove to be beneficial for
Pakistan since despite the temporary fall in exports and remittances, the
declining oil prices can help ensure that Pakistan’s trade deficit remains at a
manageable level.
