Prices of petroleum products have remained unchanged in Pakistan since May in spite of the steep rise in their international prices. Indications are that by continuously cutting its petroleum development levy (PDL) included in the pricing formula , on the one hand the government kept prices from rising and on the other, prevented refinery and oil company profits from tumbling. According to one market estimate, cutting PDL caused a drop of around Rs15 billion in tax revenues in the five-month period between May and September.

While the policy must be commended without any reservations because raising oil prices in line with international oil prices would have had a snow-balling effect on the entire cost structure of the economy, the big question awaiting a a credible answer is how long can petroleum prices be kept at their May level, given the predictions of the speculators at NYMEX that light Arabian crude could touch $75 barrel. Given the muscle flexing by the opposition on the President's uniform issue, would it be politically advisable to raise the petroleum prices now?

Dr. Ashfaque of the finance ministry asserts that his ministry has worked out the "exact cost" of increases in international price of oil, and would not pass on its effect to consumers by plugging in compensatory revenue increases from other sectors to make up for the rapid drop in revenues from PDL. According to latest figures, in the first quarter of FY05 oil import rose by 37.8 per cent over its first quarter FY04 figure making it the biggest single import item amounting to $943.5 million.

Although the policy on sustaining the prices of petroleum products is commendable, government's ability to bear revenue losses from the petroleum sector in spite of soaring oil price remains doubtful. Oil companies predict that even if oil price stays around US$ 55 barrel, government's projected FY05 deficit of $3 billion will jump to $4.2 billion, not counting the pressure from importing food grain and sugar that could mount as the effects of a dry monsoon begin to show up on the domestics crops.

These fears contrast sharply with overoptimistic projections of federal food & agriculture minister Sikandar Hayat Bosan who predicts the wheat crop to touch 20.80 million tons and cotton and rice crops to exceed their last year levels by between 8.4 to 13.1 per cent. Jolly good! The only commodity that will need to be imported would be sugar because of this year's low sugar-yielding crop. He bases his predictions on the much-contested 'adequacy' of water reserves at Mangla and Tarbela dams and down stream flows.

His optimism is not shared by many because the negative effects of the unusually dry monsoon will manifest their impact on the trade deficit as well as on the profitability of business and industry that could wipe out the hopes of compensatory revenues anticipated by the finance ministry. There is also the likelihood that low water reserves in power-producing dams will force additional imports of fuel oil to sustain power generation.

Crystallization of these scenarios will expand not just the trade deficit but the fiscal deficit as well, which may have to be funded by increased bank borrowings pushing up interest rates. Should this happen the entire price structure will creep up. A subsidiary question arising then will be about the venues for raising additional resources to subsidize food grain prices to lower the burden on low-income groups. As it is, inflation now stands at 9 per cent.

Admittedly, circumstances facing Pakistan and other non-oil producing developing nations are tough, but we carry the blame for the energy shortfall; it is the result of inaction. The Iran-Pakistan-India gas pipeline was proposed a decade ago. Had we moved on it fast enough, we would not be in the dire straits that we are because of the unprecedented increase in price of oil. Gas, far cheaper than oil, could have softened the pressure we face now.

What we now need to look at very closely is the justification for continued rise in import of plant and equipment, and pursuing an exchange rate stabilization policy that is running down the exchange reserves. By keeping its exchange rate stable, Pakistan has subsidized BMR in its archaic industrial base long enough. True, there was, and still is the need there for, but it can't be carried out all at once, especially if such a policy can lead to a fall-out in terms of de-stabilizing the overall price structure.

Unfortunately, developing states often have to postpone crucial outlay on development just to survive in a world characterized by lopsided markets. Recently, the IMF had expressed a mixture of amazement and optimism at the world GDP growth of 5 per cent, which wasn't witnessed in the last two decades, but had overlooked the fact that bulk of the growth was accounted for by non-oil producing states that remained vulnerable to increases in oil prices.

Susceptibility of major producers (Nigeria, Saudi Arabia, Iraq and Iran accounting for two-thirds of the world's oil output) to unmanageable political crises encourages speculation in oil. Nigeria's labour problems now crop up regularly. Saudi Arabia is conceived to be on road to becoming more unstable. Iraqi crisis seems nowhere near its end. In spite of IAEA assurances about Iran not going nuclear, it could still be the next on the US invasion list.

Economists now seem worried not so much about the shortage of oil but its concentration in volatile countries. They believe that political volatility and uncertainties associated with it that pushed oil prices from a low of US$ 9.55 barrel in December 1998 to over $54/ barrel at present, won't subside unless the UN and the EU can exercise greater influence on the ambitious incumbents of the White House to shed their self-righteous isolationist policies.

Besides political instability in the oil-producing states, resurgent economic growth in Far Eastern economies since 2003 raised oil consumption to a level that wiped out oil producers' spare capacity although profit-conscious oil marketing companies shifted to booking future supply contracts rather than maintain traditional buffer stocks. Many observers are convinced that, besides political uncertainties, this speculative trend was responsible for the historic hike in oil prices.

Oil shortage will remain a reality until large oil consuming countries can contain demand by switching over to energy-saving technology, invest more in oil exploration and, above all, succeed in locating economically viable reserves. This change-over (resisted by Kyoto accord violating US) threatens to slowdown growth everywhere in the medium term, which makes one wonder about the sustainability of the current profile of economic growth.

Rise in demand created by over-heating of the Chinese economy (now the second largest consumer of oil after US) is cited as the major factor enlarging the size of the mismatch between oil production and consumption. Even though its economy slowed down from 15 per cent per annum growth until 2001, to 8% at present, in 2003 year-on-year growth in China's oil demand exceeded 15 per cent, and accounted for 40% of the increase in world demand for oil.

It is estimated that if the Chinese economy continues to grow at around 6 per cent per year, by 2025 its oil consumption will quadruple. Similar estimates are being given about China's consumption of copper, steel and cement. India, with slightly less population but with prospects of surpassing China in terms of population within the next decade, is closely following the Chinese demand pattern.

If the bulk of the consumption needs of these two countries are not met domestically the rest of the world will face a crisis in meeting the demand of almost every commodity. Recent research by a British agency has revealed that urbanization is on the rise everywhere. For the moment, Pakistan may be heading the Asian countries' list in this context but, eventually, China and India will be in the lead.

A disastrous scenario could develop if either China or India fails to deliver a reasonable standard of living to its expanding populations of city-dwellers whose demand for consumer goods will rise steadily to unmanageable levels. But blaming China and India won't serve any purpose. Their needs are genuine. Extravagant consumption of oil in the West, particularly the US, must go down if the world is to avoid a crisis. More so because the West can afford to switchover to expensive alternate energy sources not poor, underdeveloped India and China.

This state of affairs poses enormously puzzling questions to politicians, macroeconomists and scientists about sustaining growth and, more importantly, the world peace. They have been caught off-guard because, for the moment, this planet clearly lacks adequacy of resources for meeting the geometrically growing demands of its rising population in a fouled up climatic environment that causes huge resource losses due to natural calamities.

Proof thereof is provided by steeply rising price indices of almost every major commodity. This state of affairs clearly points to pervasive failure of economic planners. The futile debates at forums like the WTO reflect poorly on politicians, economists and scientists. What the world needs is a powerful and effective forum that can weaken the speculators who are gaining strength under the cover of de-regulation and freeing of markets. If they are not checked, the world will lose for good its nascent faith in free markets.