What does the crash of oil prices mean for Pakistan?

Government could pass on benefit to consumers and still make up for revenue fall

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Crash in oil prices is an opportunity for countries like Pakistan because even after passing 50% of the decline on to consumers, the government could make up for revenue fall. Qatari gas will be cheaper than domestic gas, The News reported on Tuesday.

The crash in oil prices on Monday was as disrupting as the pandemic, with the US oil prices plummeting to a range between $1-2 per barrel at the filing of this report.

The Brent oil prices also hovered around $22-25 per barrel, the lowest in 22 years. The glut created by the price war between Saudi Arabia and Russia was compounded by the extremely low oil demand in most developed economies.

Read also: US oil prices bounce back after historic crash 

China, the second largest economy in the world, posted negative growth last quarter, first time in more than 35 years. Europeans are fighting for their life to control the pandemic with economic activities at a halt.

Pakistan was in the midst of its worst economic crisis before the coronavirus attack and was finding it hard to finance its huge oil bill as the crude oil was hovering in the range of $55-60 per barrel.

After the pandemic, the demand for crude started declining sharply, and it ranged for a long time between $30-40 per barrel in March. Its price started declining sharply in last 10 days with US oil showing more volatility than Brent, but the Brent oil mainly consumed in Asia. 

With the US oil prices declining to $2 (mx currently) the Brent price logically should not be more than $10 which means a price of $12 per barrel. At the moment, the Brent Oil is still priced at $22 per barrel but if the buyers started buying from US this price would not hold.

Feasible to procure gas at lower prices

This low oil price has vindicated former PM Abbasi's inking of an agreement with Qatar for buying Liquefied Natural Gas at 13% of the Brent oil price. At current Brent oil rates, Pakistan will be buying LNG from Qatar at $2.6-2.8 per mmbt. At this rate it would be feasible for the state to procure gas from Qatar at a price even lower than our local gas.

Qatar is bound under agreement to provide this gas as Pakistan is bound to lift a certain quantity of cargo from Qatar whether we needed it in domestic market or not.

The country should exploit this opportunity as long as it is available. It could lower the gas tariff for all industries much below the price that the government is charging from exporting industries after paying huge subsidy.

At the same time, the cost of electricity from gas run power plants would also decline appreciably. The furnace oil rates would be lower than that of coal. It will be an opportunity to streamline our energy and power sector while this opportunity lasts.

The low oil prices would also give the government an opportunity to make up for huge revenue losses that it suffered before and after pandemic. It would definitely pass on some of the benefit of this lower price to the consumers that would be enough to satisfy them. 

It could retain the balance by enhancing petroleum levy and pocket at least Rs800 billion from this levy which would be Rs400 billion higher than the earnings government earmarked from this item.

Originally published in The News