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Increase in oil prices

March 01, 2011

THE PPP has taken a risk in increasing domestic oil prices — which will be the first such raise since November, provided the government doesn’t once again buckle under pressure as it did in January. No political party, let alone those parties that draw their strength from the urban areas, would endanger its popularity by supporting the decision. The MQM, which had withdrawn its ministers from the coalition at the centre after the government attempted to raise oil prices in January, is protesting again. The PML-N, which has only recently expelled the PPP from the coalition in Punjab, may well try to capitalise on public sentiment to push for mid-term polls. Indeed, the decision may, in all likelihood, add to the woes of a fragile government that is already faced with tough challenges.

There are countless arguments against the oil price increase. It will foster inflation, force people to cut down on their essential costs on food, health and education, stall economic recovery, make exports more expensive, and so on. True, the argument that this increase could be avoided by revamping the oil-pricing formula, reducing profits of refineries and cutting taxes for the sake of consumers is a popular one. Yet the question remains: can the government afford to cut petroleum levies and keep subsidising consumers with the spiralling budgetary deficit threatening to rise above eight per cent of GDP? Not impossible, but perhaps next to impossible. The recent increase in global oil markets caused by the turmoil in North Africa and the Middle East could well push crude prices to well above $100 a barrel. The developed economies fear slowdown even with the oil prices hovering around the current level of less than $100. Pakistan’s economy is too weak to afford the luxury of subsidising oil consumption. The government has lost Rs18bn because it has failed to increase prices since November. The latest increase is still not enough to cover the losses. Oil prices are a favourite with fiery speakers keen on practising issue-based politics, but politically-motivated words and actions could hurt people more than the price hike itself.