Oil price windfall

Published December 22, 2014
.—AP/File
.—AP/File

OIL prices have defied all projections as the downward spiral continues. According to the IMF’s World Economic Outlook, last year the average price of oil in international markets was $104 per barrel, and as of April this year it was forecasting the price would remain at that level throughout 2014 as well, with a small decline to $97 in 2015.

Instead, the price has plummeted steadily since June when it stood at $115, accelerating from September onwards. When Opec failed to agree on production curbs in its last meeting in Vienna on Nov 27, the price fell steeply to as low as $51 on contracts for February’s delivery.

The declines stem from a glut in the markets, coupled with contracting demand as global growth remains sluggish. More importantly though, increasingly the collapse is being recognised as engineered by Saudi Arabia, the country at the heart of Opec’s refusal to curb production, to hurt Iran and constrain its growing influence in the Middle East.

Know more: Will oil prices continue to fall?

Pakistan had erred on the side of caution in its last budget and its estimates for oil prices at $109 for the fiscal year 2015 were higher than IMF forecasts.

According to that figure, the oil import bill was estimated to come in at $15.5bn for the current fiscal year. The real windfall from this price decrease has yet to arrive since much of the oil landing in Pakistan thus far this fiscal year was contracted before the downward spiral got under way in earnest.

Thus far, the reported oil import bill is slightly higher than in the corresponding period last year. But that is now set to change, as oil being contracted today for delivery in the first few months of 2015 is being purchased at prices almost half of what was expected.

There is a danger that this windfall can lead to complacency and poor utilisation of the resultant savings. If it is true that the declines are due to geopolitical reasons, then it stands to reason that they can reverse very quickly.

The IMF, as well as other international agencies, is warning of a price spike due to geopolitical developments in the Middle East. The government must not allow the lower prices to breed a sense of comfort on the reform measures undertaken to wean our economy off its dependence on imported oil.

It must also resist the temptation to utilise foreign exchange savings to artificially prop up the value of the rupee. The windfall should be seen as a window of opportunity to take the necessary steps to move towards cheaper fuels, as well as renewable sources of energy instead.

A brief spell of respite on the external front is a good opportunity to bring down the external debt service bill, as well as help ensure price stability. That would be money well spent.

Published in Dawn, December 22th, 2014

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.