KARACHI: Like their peers in the West, the Pakistan economists believe that the honeymoon with low international oil prices could continue for at least the foreseeable future.

Dr.Hafeez Pasha, professor emeritus at Lahore School of Economics told Dawn on Saturday evening that he foresees the equilibrium prices of crude for the next four to five years at $60 to $70 a barrel.

He said that there could be blip-up-blip down, but $100 was not anywhere in sight.

Dr.Hafeez Pasha observed that two factors rolled down the prices per barrel of oil in the last eight months: One that the Saudi Arabia wanted to discourage the US Shale producers and render their exploration and production uneconomical and second to make life difficult for Russia and Iran.

He believed that both goals were achieved to an extent; Venezuela bore the collateral damage. He thought that the Saudis could afford to take the hit, since they had enjoyed the blessings of mounting crude prices for 6-7 years.

Investment banker Mir Mohammad Alikhan asserted that the slight recovery in oil prices in the last few days was “nothing but a contango.”

Contango in financial terms, he explained, means that people are willing to pay a higher price for a certain commodity in the future than the actual ‘expected price’.

It simply meant that the price had not fully bottomed out. It was nothing but a short covering and anxiety based buying.

“This is for the first time in world history that a financial issue has intertwined with a political issue” Mir thought there were too many technical issues involved as Shale production had to be pushed down further to combat the oversupply, while Opce had to get its act together.

“If the mess is not handled correctly by the Opec, it just might be end of it forever,” he thought.

Buying oil stocks, which had recently lost considerable value at the KSE, could be ‘getting sucked into it,” Mir said, adding that he could see oil going down as low as $35 a barrel.

Yet, all in all, he stressed that it was a good thing for the equity markets.

Muzammil Aslam, MD Emerging Market Research, said he would go with the theory of low oil prices for a long time and pointed to the assertion by Saudi Prince Al-Waleed Bin Talal — considered to be one of the biggest capital market investors in the world — that $100 a barrel for crude was now a thing of the past.

A Citibank Global research strategists had predicted oil price to bottom out at $20 a barrel and average to remain at $54 in next many years.

Muzammil said that up until mid-2014, oil prices were directly linked to two factors: Global growth and geo-political situation. To that, the supply side was added in the shape of Shale output.

“All of that has started a price war.” Yet, what was important from Pakistan’s view was how to deal with the issue?

Muzammil said that while the low crude price was blessing to vast number of industries, it would also deal a crowning blow to the economy in decreased tax revenue.

He believed that the country’s economic managers should take a bold view. One that, they ought to diversify from conventional means of taxation; two that Pakistan should take positions in hedging oil, which could help to cut down future losses of PIA, railways, Wapda and other oil dependent industries and sectors and third that instead of sitting back, the economy managers should seize advantage of the breathing space and speed up the work on alternative fuels, like coal, wind, water, so as to insulate the economy against ‘oil shock’ if that happens in the future.

Published in Dawn, February 15th, 2015

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