KARACHI, Aug 9: Politics more than economics is possibly restraining the government to pass on the impact of record rise in international oil prices to the general public.

Adverse effects of a fattening oil bill is being absorbed by the state without upward 'adjustment' of prices of petroleum products as was the norm before. With the election of the new Prime Minister in the offing and a shaky law and order situation, this clearly is not the time to spoil the public mood.

Economists calculate that with the record rise in oil prices, the government would have to bear additional foreign exchange payments as well as suffer billions of rupees in budget shortfall on account of lower Petroleum Development Levy (collection).

Brent North Sea crude oil prices hit a new record of $41.50 per barrel in London and historic peak of $44.77 in New York on Friday. European Stock markets fell sharply in the wake of heavy falls on Wall Street and losses in Asia. Pakistani bourses, nonetheless, are keeping up the firm trend unconcerned (KSE index gained 20 points on Monday).

Murad Ansari, at KASB Securities said in a note to the clients on Monday that although there was room for oil prices to climb down from current range of $40-44 per barrel, he believed that the room was not too much.

"With oil prices of domestic upstream companies linked to international prices, we believe that upstream oil and gas companies are likely to show strong profits in the current year as well."

Wajahat Ali, head of research at Taurus Securities and Humaira Zaheer, head of research at Capital One Equities agreed that upstream companies such as OGDC, PPL and POL would benefit from the rise in price for their sale prices in terms of value were determined by international prices and linked to Arabian Light Crude fob. Such was not the case with Oil Marketing Companies (OMCs) who may not notice substantial impact on sales or profitability on this account.

But the government was decidedly taking the brunt of the blow. Sakib Sherani, chief economist at ABN-Amro Bank said in a note on Friday: "By freezing domestic petroleum prices at current levels, the government was providing an effective subsidy to consumers by absorbing the differential in budget via the Petroleum Development Levy (PDL)".

He calculated that if international oil prices average $35/bbl for FY05, government could face a shortfall of approximately Rs25-30 billion in the budget via lower PDL collection (budget target for PDL in FY05 is Rs47 billion).

Sakib also reckoned that if international oil prices averaged $35 per barrel throughout FY05, it would add approximately $600 million (net) in additional foreign exchange payments. The pressure would be exacerbated by the need to import furnace oil in FY05 due to lower hydel-power generation.

Abdul Rasheed, analyst at Invest Cap said that higher crude oil prices would have two-fold impact on the local economy. If current high oil prices remain constant throughout this fiscal year, oil import bill was likely to touch $4bn in FY05. That would upset the Government target of trade deficit of $3bn for FY05 ($3.2bn in FY04).

Corporate profitability may not remain undisturbed. Wajahat Ali believes that companies with huge component of fuel costs in their cost of sales would be more effected. They would have to foot a heftier bill for fuel.

Also with the rise in coal prices and decline in hydel power generation, oil costs could impact corporate bottom lines. But most analysts thought it imprudent to revise their earning forecasts for companies for FY05, without watching the trend of flow of oil for another six months.

"The prices are rising so fast, it is difficult to make accurate assessments of company profits, until they settle down a bit," says Humaira at Capital One Equities.