Industrial consumption of petroleum, oil and lubricants (POL) in the year 2001-02 is expected to fall by around one million tons to 17 million tons from 18.2 million tons in 2000-01.

Economic slowdown specially after post September 11 tragedy in the US, stand-off between Pakistan and India in December, higher conversion of vehicles to the CNG from petrol, reliance on hydel power generation and shifting of power and cement plants to gas, are considered as main reasons of declining the POL consumption in the country. Even falling domestic oil prices also failed to lift the demand particularly in petrol and diesel.

The oil marketing companies (OMCs) will remember the July-December 2001-02 as a “nerve wrecking period” in terms of their profits due to economic slowdown, poor demand and lower prices. As for the government, it was period of foreign exchange savings by 27 per cent in terms of oil import bill — $1.349 billion as compared to $1.840 billion in July-December 2000.

The OMCs will be shocked in February, 2002 to see their earnings plunging by at least 40-50 per cent in July-December 2001 as compared to the same period of 2,000, oil analysts say. The Pakistan State Oil (PSO) and the Shell Pakistan Limited (SPL) had made a profit of Rs1.3 billion and Rs485 million in July-December 2000 but this time their balance sheets will be in red.

Petroleum prices have declined by at least 15-20 per cent in the last six months, thus inflicting inventory losses to the OMCs which maintain two to three weeks stocks. In the last three and a half months, petroleum prices have changed by no less than nine times as compared to just two times in the last 32 years. A substantial portion of the OMCs earnings comes from profit on low cost inventories.

This is perhaps for the first time that the POL consumption has been under pressure since July, 2000, falling by an average 10 per cent every month till December 31, 2000. In July-September 2,001 it fell by 13.5 per cent followed by 10.5 per cent in July-October and 11.20 per cent in July-November 2001.

The figures of July-December, 2001 are also alarming as the consumption has dropped by 10.3 per cent. In the same period of 2,000, the POL consumption was 8.8 million tons, led by fuel oil by 3.9 million tons and diesel at 3.5 million tons.

The POL demand has been recording a steady growth from 16.3 million tons in 1995-96 to 17.3 million tons in 1997-98 and to 18.2 million 2000-2001. The share of diesel and furnace oil is 40 per cent and 45 per cent respectively.

This bleak scenario in the last six months clearly portrays the country’s unstable economic health in the wake of September 11 incidents followed by India-Pakistan tussle that severely affected country large scale manufacturing as well as exports.

Oil sector analysts believe that the economy may come out of the woods in the first six months of 2002 following the start of reconstruction and rehabilitation activities in Afghanistan and the cooling down tension between two arch rivals India and Pakistan but it may not fully offset the negative impact of July-December 2001 on the petroleum sector.

The country’s rising foreign exchange reserves, promises of donor agencies for more grants and aids, increase of textile quota in the European Union (EU) and in the US may provide some backing to the ailing economy in the months ahead and exports are expected to pick up. The real picture of the country’s industrial output and exports will appear in January.

Petrol: The rising number of conversion of cars and vehicles to the CNG is the main reason of falling petrol consumption. More than 200,000 vehicles have been converted to the CNG in the last two years despite the fact that the petrol prices have fallen by more than 10 per cent since October 1. In future, this scenario is likely to persist unless the difference between petrol and the CNG prices remains 50 per cent. In December, people had stopped converting their cars to the CNG due to the drop in petrol prices but again the situation has turned following increases on January 1 and 15.

Diesel: Slow activity in industrial and large manufacturing sector and declining business prospects under the Afghan Transit Trade (ATT) can be blamed for fall in demand of diesel despite price fall of over 15 per cent since October 1. The share of diesel in Pakistan’s total oil sales is 40 per cent.

Fuel oil: An average 10 per cent decline has been recorded in the demand of fuel oil in the July-December 2000 mainly due to falling demand from WAPDA. The water situation (reservoir levels) in the first half improved to allow WAPDA to use more of its hydel power generation capacity and rely less on thermal.

Conversion of some state-run and private power plants to locally produced natural gas from fuel oil also contributed to the decline in fuel oil demand.

This demand is expected to pick up from March when WAPDA will switchover to thermal source of power generation to cope up with large demand of electricity in summer.

WAPDA has also decided to buy fuel oil from Shell instead of PSO and this decision will increase sales of Shell. Fuel oil alone constitutes more than 45 per cent of country’s total oil sales. More than 70 per cent of fuel oil is used by the power generation firms followed by industrial units consuming over 15 per cent of fuel oil.

Kerosene: Consumers’ preference to liquefied petroleum gas (LPG) has affected the demand of kerosene all over the country. Kerosene used to be heavily consumed by petrol pump owners for mixing in diesel due to its lower rates prior to October. Since the rates of kerosene have almost equalised to diesel, pump owners do not find it feasible to mix it with diesel.

JP-1: About 25 per cent decline was seen in the offtake of jet fuel by the aviation industry due to suspension of operation by foreign airlines to Pakistan coupled with cutting of flights by the national carrier after September 11.

Majority of foreign airlines have now come back to Pakistan and it may increase the consumption to old levels.

The head of research, Invest Capital and Securities, Mohammad Sohail said that a very hard time was ahead for OMCs in February when the shocking result will come out. Lower consumption with weak oil prices had given a double blow to this growing segment of the economy.

He said a lower POL consumption proved good for foreign exchange as Pakistan produced only 15 per cent of the total oil requirements of 18.2 million tons but it hurts the profitability of OMCs.