Pakistan has experienced an average inflation rate of eight per cent from 1957 until 2023. However, at roughly 38 per cent, we recorded the highest inflation rate in our history. Many factors, like political instability, industrial halt, depreciating exchange rates, and outpour of investments due to default risk, play a role in the steep rise in inflation rates.
Increasing petroleum prices highly influences rising living costs. In a little over a year, Pakistan experienced petrol prices rising from Rs150 per litre to over Rs320 per litre.
Although it can be argued that petroleum costs are driven up due to the factors mentioned earlier, another internal shortcoming adds fuel to this fire: the lack of crude oil refinery infrastructure, which leads to Pakistan being a net importer of refined oil. This adds greatly to the import costs, so the public has to bear the extra burden.
An increase in petrol prices means an increase in production costs, transportation costs, and electricity costs, which in turn leads to the end products, from necessities like grains, medicines, and clothing to leisure activities like dining out, becoming more expensive. If the country’s economic backbone relies on petrol, there needs to be a coherent system to meet the demands sustainably and economically efficiently.
Despite the tall promises, importing oil from Russia is not a cost-effective solution for Pakistan
However, none of the refineries can operate at full capacity due to worn-out machinery, outdated infrastructure, and the lack of indigenous crude oil extraction. The local oil production amounts roughly to only 20pc of the total demand.
Moreover, since Pakistan’s economy has a persistent trade deficit, the government is forced to import refined petroleum products at high costs against deferred payments, which seem to work in the shorter run but only add to the list of issues in the longer term.
The government always turns to our oil trade partners, including Oman, Kuwait, UAE, Qatar and Saudi Arabia, to fulfil the lack of local oil production. Pakistan imported about $10 billion worth of petro-products from these trading partners in 2020.
In the ongoing inflation wave, Pakistan did seem to find another lucrative trading partner, Russia, who was willing to sell oil at a discounted price due to their normal trade being disrupted by sanctions amidst the Russia-Ukraine conflict. Although this possibility came as a sigh of hope, this plan was sabotaged by deficiencies in the oil refining industry of Pakistan.
A better alternative may be to focus on internal infrastructure and invest in Balochistan, which is full of resources that the country already possesses
In April 2023, Musadiq Malik mentioned the status of commercial details of the Russian oil deal. He emphasised that Russia has tentatively accepted the idea of providing Pakistan with crude oil at a discount this year.
Despite the bilateral formal documentation, in June 2023, Russia denied granting a special discount to Pakistan. According to media reports, Energy Minister Nikolai Shulginov informed reporters at an international economic conference in St. Petersburg that the pricing for Pakistan was identical to that offered to other countries.
Another loophole was that Russia wanted to export crude oil instead of refined oil, which could cost an additional 4$ per barrel to refine, and Pakistan’s refineries are not upgraded enough to refine the hard Russian oil.
The third obstacle pertains to the elevated transportation expenses incurred when importing Russian oil. While it is difficult to provide an exact figure for transportation costs, experts in the oil industry asserted that the cost of transporting Russian oil to Pakistan may be three times greater than that of Arabian oil.
These added expenses diminish the projected cost savings that Pakistan anticipates from each imported barrel of oil. To sum up, Pakistan’s deal with Russia for crude oil has limited viability. Instead, a better alternative may be to focus on internal infrastructure and invest in Balochistan, which is full of resources that Pakistan already possesses.
The writers are students at the Lahore University of Management Sciences
Published in Dawn, The Business and Finance Weekly, November 20th, 2023