OIL SECTOR OF PAKISTAN

SUBMITTED TO:
SIR GULZAR KHAN

SUBMITTED BY:
HAMID KHURSHID
 DEDICATION

This project is dedicated to my respected teacher Sir Gulzar Khan and my parents and all
those whose prayers have always paved the way to success. The ultimate dedication is
towards those innocent people who died by suicide bomb blast in Pakistan before their
time
 ACKNOWLEDGEMENT

All praise to Almightily Allah and His last Prophet (PBUH) who have bestowed upon me
Their blessing, which helps and enabled me to accomplish this project successfully. At
the outset, I feel obliged to express my profound gratitude to my supervisor Sir Gulzar
Khan, who has provided me with endless help, valuable guidance and encouragement.
His expertise, experience and ability to open new vistas of knowledge have contributed
much in meeting my educational quest. Beside I truly appreciate my friends and class
fellows who have helped me immensely in making my project achievable and complete.
Their support and guidance made this project possible.
 OUTLINE

• Introduction
• Organization of the Petroleum Exporting Countries(OPEC)
• Economy of Pakistan
• Pakistan’s Oil Sector
• Current Supply and Demand Situation of Oil Sector
• Oil Consumption by User Sector
• Pakistan Oil Sector Organization
• Major Companies and Their Share
• Upstream Sector
• Down Stream Sector in Pakistan
• Supply and Demand of Downstream Products
• Major Refineries and Their Capacity
• Consumption of Refined Petroleum Products and Their Future
• Future demand of different petroleum products
• Future Refinery Projects
• Analysis of high oil prices on Pakistan's economy
• Pakistan’s Oil Dependency:
• The Dynamics of Pakistan’s Energy Economic Problems
• Price of Oil and Trade Deficit
• Price of Oil and National Income Accounting
• Oil Prices and GDP Growth Rate
• Linkage between Oil Prices, Inflation, and lower GDP growth
• Summarized Negative Affects of Rising Oil Prices on Pakistan
• Conclusions
• Regression equation
 INTRODUCTION:

The petroleum industry includes the global processes of exploration, extraction, refining,
transporting (often by oil tankers and pipelines), and marketing petroleum products. The
largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is
also the raw material for many chemical products, including pharmaceuticals, solvents,
fertilizers, pesticides, and plastics. The industry is usually divided into three major
components: upstream, midstream and downstream. Midstream operations are usually
included in the downstream category.

Petroleum is vital to many industries, and is of importance to the maintenance of

industrialized civilization itself, and thus is a critical concern for many nations. Oil
accounts for a large percentage of the world’s energy consumption, ranging from a low of
32% for Europe and Asia, up to a high of 53% for the Middle East. Other geographic
regions’ consumption patterns are as follows: South and Central America (44%), Africa
(41%), and North America (40%). The world consumes 30 billion barrels (4.8 km³) of oil
per year, with developed nations being the largest consumers. The United States
consumed 25% of the oil produced in 2007.[2] The production, distribution, refining, and
retailing of petroleum taken as a whole represents the world's largest industry in terms of
dollar value.

Natural history

Petroleum is a naturally occurring liquid found in rock formations. It consists of a

complex mixture of hydrocarbons of various molecular weights, plus other organic
compounds. It is generally accepted that oil, like other fossil fuels, formed from the
fossilized remains of dead plants and animals by exposure to heat and pressure in the
Earth's crust over hundreds of millions of years. Over time, the decayed residue was
covered by layers of mud and silt, sinking further down into the Earth’s crust and
preserved there between hot and pressured layers, gradually transforming into oil
reservoirs.

Early history

Petroleum in an unrefined state has been utilized by humans for over 5000 years. Oil in
general has been used since early human history to keep fires ablaze, and also for
warfare. Ancient Persian language tablets indicate the medicinal and lighting uses of
petroleum in the upper echelons of their society. Ancient China was also known to burn
skimmed oil for light

An early petroleum industry was established in the 8th century, when the streets of
Baghdad were paved with tar, derived from petroleum through destructive distillation In
the 9th century, oil fields were exploited in the area around modern Baku, Azerbaijan, to
produce naphtha. These fields were described by al-Masudi in the 10th century, and by
Marco Polo in the 13th century, who described the output of those oil wells as hundreds
of shiploads. Petroleum was distilled by al-Razi in the 9th century, producing chemicals
such as kerosene in the alembic, which he used to invent kerosene lamps for use in the oil
lamp industry.

Its importance in the world economy evolved slowly, with wood and coal used for
heating and cooking, and whale oil used for lighting well into the 19th Century. A
petroleum industry emerged in North America in Canada and the United States, fueling
the industrial revolution. The Industrial Revolution generated an increasing need for
energy which was fuelled mainly by coal, with other sources including whale oil.
However, it was discovered that kerosene could be extracted from crude oil and used as a
light and heating fuel. Petroleum was in great demand, and by the twentieth century had
become the most valuable commodity traded on the world market
Organization of the Petroleum Exporting Countries
(OPEC)

The Organization of the Petroleum Exporting Countries (OPEC), is a cartel of twelve

countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar,
Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its
headquarters in Vienna since 1965,[2] and hosts regular meetings among the oil ministers
of its Member Countries. Indonesia withdrew its membership in OPEC in 2008 after it
became a net importer of oil, but stated it would likely return if it became a net exporter
in the world again.

According to its statutes, one of the principal goals is the determination of the best means
for safeguarding the cartel's interests, individually and collectively. It also pursues ways
and means of ensuring the stabilization of prices in international oil markets with a view
to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the
interests of the producing nations and to the necessity of securing a steady income to the
producing countries; an efficient and regular supply of petroleum to consuming nations,
and a fair return on their capital to those investing in the petroleum industry.[4]

OPEC's influence on the market has been widely criticized, since it became effective in
determining production and prices. Arab members of OPEC alarmed the developed world
when they used the “oil weapon” during the Yom Kippur War by implementing oil
embargoes and initiating the 1973 oil crisis. Although largely political explanations for
the timing and extent of the OPEC price increases are also valid, from OPEC’s point of
view, these changes were triggered largely by previous unilateral changes in the world
financial system and the ensuing period of high inflation in both the developed and
developing world. This explanation encompasses OPEC actions both before and after the
outbreak of hostilities in October 1973, and concludes that “OPEC countries were only
“staying even” by dramatically raising the dollar price of oil.”[5]

OPEC's ability to control the price of oil has diminished somewhat since then, due to the
subsequent discovery and development of large oil reserves in Alaska, the North Sea,
Canada, the Gulf of Mexico, the opening up of Russia, and market modernization. OPEC
nations still account for two-thirds of the world's oil reserves, and, as of April 2009,
33.3% of the world's oil production, affording them considerable control over the global
market. The next largest group of producers, members of the OECD and the Post-Soviet
states produced only 23.8% and 14.8%, respectively, of the world's total oil production. [6]
As early as 2003, concerns that OPEC members had little excess pumping capacity
sparked speculation that their influence on crude oil prices would begin to slip.

Membership

Current members

OPEC has twelve member countries: six in the Middle East, four in Africa, and two in
South America.

Country

Joined OPEC
Region
Population Area
(July
 2008)
Algeria Africa 1969 33,779,668 2,381,740
Angola Africa 2007 12,531,357 1,246,700
Ecuador South America 2007[A 1] 13,927,650 283,560
Iran Middle East 1960[A 2] 65,875,224 1,648,000
Iraq Middle East 1960[A 2] 28,221,180 437,072
Kuwait Middle East 1960[A 2] 2,596,799 17,820
Libya Africa 1962 6,173,579 1,759,540
Nigeria Africa 1971 149,255,312 923,768
Qatar Middle East 1961 824,789 11,437
Saudi Arabia Middle East 1960[A 2] 28,146,656 2,149,690
United Arab
Middle East 1967 4,621,399 83,600
Emirates
Venezuela South America 1960[A 2] 26,414,816 912,050
11,854,977
Total 369,368,429
km²

ECONOMY OF PAKISATAN

The economy of Pakistan is the 27th largest economy in the world in terms of purchasing
power, and the 48th largest in absolute dollar terms. Pakistan has a semi-industrialized
economy,[6][7][8] which mainly encompasses textiles, chemicals, food processing,
agriculture and other industries. Growth poles of Pakistan's economy are situated along
the Indus River,[8][9] diversified economies of Karachi and Punjab's urban centers, coexist
with lesser developed areas in other parts of the country. [8] The economy has suffered in
the past from decades of internal political disputes, a fast growing population, mixed
levels of foreign investment, and a costly, ongoing confrontation with neighboring India.
However, IMF-approved government policies[citation needed], bolstered by foreign investment
and renewed access to global markets, have generated solid macroeconomic recovery the
last decade. Substantial macroeconomic reforms since 2000, most notably at privatizing
the banking sector have helped the economy.

GDP growth, spurred by gains in the industrial and service sectors, remained in the 6-8%
range in 2004-06. Due to economic reforms in the year 2000 by the Musharraf
government.[10] In 2005, the World Bank named Pakistan the top reformer in its region
and in the top 10 reformers globally.[11] Islamabad has steadily raised development
spending in recent years, including a 52% real increase in the budget allocation for
development in FY07, a necessary step toward reversing the broad underdevelopment of
its social sector. The fiscal deficit - the result of chronically low tax collection and
increased spending, including reconstruction costs from the devastating Kashmir
earthquake in 2005 was manageable.

Inflation remains the biggest threat to the economy, jumping to more than 9% in 2005
before easing to 7.9% in 2006. In 2008, following the surge in global petrol prices
inflation in Pakistan has reached as high as 25.0%. The central bank is pursuing tighter
monetary policy while trying to preserve growth. Foreign exchange reserves are bolstered
by steady worker remittances, but a growing current account deficit - driven by a
widening trade gap as import growth outstrips export expansion - could draw down
reserves and dampen GDP growth in the medium term

Pakistan’s Oil Sector

According to Oil and Gas Journal (OGJ), Pakistan had proven oil reserves of
300 million barrels as of January 2006. The majority of produced oil comes from
Proven reserves located in the southern half of the country, with the three largest
oilproducingfields located in the Southern Indus Basin. Additional producing fields are
Located in the Middle and Upper Indus Basins

Overview

Pakistan’s produces about 60,000 barrels of oil per day which only meets approximately
one sixth of the country’s current oil requirement. The balance amount is imported at a
staggering cost of US$2.5 Billion. In view of the increasing demand and the current
decline in production this cost is going to increase substantially over the next couple of
years.
The demand for natural gas is exceeding supply due to increased usage in the domestic,
industrial and power generation sectors. Apart from this, Pakistan does not have the
necessary infrastructure to cope with the increasing volumes of imported oil and requires
substantial investment to support this infrastructure. The Privatization of the units in the
oil and gas sector will not only increase the operational efficiency of these units but also
contribute towards new injection of investment

Background
Pakistan has been considered a petroleum province. First well was drilled in 1866 at
Kundal in the upper region of Indus valley. Shallow wells were drilled in the following
years, and from 1886, small scale production of oil started in Khattan (Balochistan). In
1915, the first series of commercial oil discovery was made in the Potwar basin (Punjab).
In 1960’s Oil and Gas Development Company Limited (OGDCL) was created by the
Government of Pakistan, which provided successful track in discovery of oil and gas
reserves with in the country. After the oil crisis in 1973, a number of impressive
discoveries were made both by the private sector and OGDCL.In June, 2006, initial
recoverable gas reserves were estimated at 52 TCF of which 33 TCF remain to be
produced; oil reserves are much more modest with initial recoverable reserves of 844
million bbl and a remaining balance of 309 million bbl
Policy

The Petroleum Policy of 1994 assisted in the development of the upstream sector. The
Policy, however, could not arouse sufficient interest to attract interest in the
downstream sectors, off shore areas and the Baluchistan Basin.The 1997 Petroleum
Policy is based on a review of the 1994 Policy and offers major incentives in the
upstream and downstream petroleum sector,, including a package based on production
sharing arrangements for offshore areas. The Policy focuses on mobilization of greater
resources and promotion of private sector investment in the oil and gas sector.

Efforts are being make to exploit the existing energy resources to build a strong
indigenous exploration and production base. These efforts are directed at achieving cost
effectiveness, reduction in import dependence, promotion of self-reliance through
accelerated exploitation of energy resources and minimum environmental degradation.
In addition, a number of far-reaching measures have been taken which include
attracting private foreign investment, creating a qualitatively improved infrastructure in
oil and gas industry, development of an efficient and transparent management,
deregulation of downstream petroleum marketing sector and rationalization of prices
and LPG allocation.

A new package for offshore exploration has been prepared for attracting exploration
investment in off-shore areas which has so far remained relatively limited. A separate
Holding Company, Gas Regulatory Authority and Petroleum Regulatory Board arplanned
to be established for privatization. The privatization of SNGPL and SSGCL is under
process. The import of LPG has been liberalized to promote investment in import of
LPG, storage and infrastructure on the basis of commercial opportunities and risk. This
would facilitate those areas of the country, which are not yet connected with pipeline
network.

Statistics

The major sources of commercial energy supplies in the country include oil, gas, coal,
liquefied petroleum gas (LPG), hydel power, thermal power and nuclear power. The
quantum of energy supplies from these sources during July-March 1996-97 stood at
124.97 million barrels of oil/petroleum products, 522,768 Mcf of gas, 43,605 kWh of
electricity and 2,366 thousand tones of coal. Out of the total commercial energy
supplies in the country during July-March 1996-97, oil accounted for 42.70 percent
followed by gas (37.68%), hydel power (14.14%), coal (5.30%) and nuclear power
(0.18%).

Oil is the largest source of energy supply accounting for 42.70 percent of total supply
during July-March 1996-97. Oil by and large is an important source of energy.
However, an increasing proportion of oil requirement is being met from domestic
production.Next to oil, natural gas is a major source of energy accounting for 37.68
percent of the total energy supply. Apart from being a cheap source of energy for
domestic consumers, it is a feed stock for chemical fertilizers and a major source of
energy for thermal power and cement plants.

The country has recoverable gas reserves of 20.814 trillion cubic feet. The average
production of gas during July-March, 1996-97 was 1,909 million cubic feet per day
against 1,806 million cubic feet per day during July-March 1995-96. Main companies
currently engaged in exploratory and development activities are LASMO, MGCL,
OGDC, OXY, POL, PPL and UTP.

The country has recoverable oil reserves of 209 million barrels. The average oil
production during July-March 1996-97 was 58,784 barrels per day of which 22,154
barrels per day was produced in the northern region and 36,630 barrels per day in the
southern region. The oil production in the northern region declined due to natural
depletion of oil fields.

Current Supply and Demand Situation of Oil Sector

Since the late 1980s, Pakistan has not experienced many new oil fields coming online. As
a result, oil production has remained fairly flat, at around 60,000 barrels per day (bbl/d).
During the first eleven months of 2006, Pakistan produced an average of 58,000 bbl/d of
crude oil. However, Pakistan has ambitious plans to increase its current output to 100,000
bbl/d by 2010. Due to Pakistan’s modest oil production, the country is dependent on oil
imports to satisfy domestic oil demand. As of November 2006, Pakistan had consumed
approximately 350 thousand barrels of oil and various petroleum products, of which,
more than 80 percent was imported. The majority of oil imports come from the Middle
East, with Saudi Arabia as the lead importer
In recent years, the combination of rising oil consumption and flat oil production in
Pakistan has led to rising oil imports from Middle East exporters. In addition, the lack of
refining capacity leaves Pakistan heavily dependent on petroleum product imports.
Natural gas accounts for the largest share of Pakistan’s energy use, amounting to about
50 percent of total energy consumption. Pakistan currently consumes all of its domestic
natural gas production, but without higher production Pakistan will need to become a
natural gas importer. As a result, Pakistan is exploring several pipeline and LNG import
options to meet the expected growth in natural gas demand. Pakistan’s electricity demand
is rising rapidly. According to Pakistani government estimates, generating capacity needs
to grow by 50 percent by 2010 in order to meet expected demand.
Oil Consumption by User Sector
In Pakistan transport sector in the biggest user of the petroleum products which accounts
about 48 percent followed by power generation which uses about 36 percent, and
industrial sector which has a share of 12 percent while remaining is shared by the
residential sector.
Pakistan Oil Sector Organization
Oil sector of the country is organised and regulated by ministry of petroleum and natural
resources created in 1977. Ministry offers oil concession through open tendering systems
and by private negotiations. To boost the oil sector and to encourage it, ministry offers
various taxes and royalties payment incentives to oil companies working in the country.
There are almost four major national oil companies currently involved in the sector,
namely Oil and Gas development corporation limited (OGDCL), Pakistan petroleum
limited (PPL), and Pakistan state oil company limited and Pakistan oilfields limited
(POL). All these four companies are joint ventures and partnership between different
international companies and some domestic firms. Major international oil companies
currently involved in the business in country are BP (UK), ENI (Italy) OMV (Austria)
and Orient petroleum (Canada)Share of government in upstream, downstream and oil
marketing companies is explained below in table [OCAC, World Bank Report].
Major Companies and Their Share
State-owned Oil and Gas Development Company (OGDC) is the leading upstream oil
company in Pakistan and is on the government short-list for near-term privatisation.
Current oil production is just over 41,000 barrels per day (b/d), plus 8.8bn cubic metres
(bcm) per annum of gas. OGDC carries out exploration and developmentactivities on its
own as well as in joint ventures with other oil companies. It owns 100% of seven
concessions and has non-operating working interests in another seven concessions
operated by other companies.

Pakistan Petroleum Limited (PPL) is engaged in the exploration, prospecting,

development and production of oil and natural gas resources In Pakistan, BP focuses
primarily on exploration and production through BP Pakistan Exploration and
Production. BP in Pakistan normally works with state run oil company OGDC. BP has a
share of 43 % in total oil discovery of Pakistan
Upstream Sector
Pakistan has long been considered a petroleum province – the first well was spudded in
1866 at Kundal in the upper Indus region. Shallow wells were drilled in the following
years, and from 1886, small scale production of oil started in Khattan (Balochistan). In
1915, the first of a series of commercial oil discoveries was made in the Potwar basin
(Punjab) the initial discoveries were made by private companies, in the early 1960’s, the
Oil and Gas Development Company Limited (OGDCL) was created, which developed a
successful track record in discovering oil and gas reserves

Down Stream Sector in Pakistan

Net oil imports of Pakistan are projected to rise in coming years as demand for theses
products are very high and production capacity is very low at a constant rate.Demand for
refined petroleum products also exceeds domestic oil refining capacity, so nearly half
of Pakistani oil imports are refined products. Some figures below give some picture of
production and consumption of refined oil products

Supply and Demand of Downstream Products

Share of the petroleum products is about 40 percent of the current energy consumption in
Pakistan. This consumption has grown sharply during 1980s at rate of almost 7 percent
per annum but it has shown a decreasing trend during 1990s and later it gained the pace
during 2004-2005 at about 10 percent per annum. The consumption of the petroleum
products during 2003-04 was about 14 MTOE. This sharp decline in the consumption as
compare to previous years was due to the decreasing demand of Furnace oil (FO). As
furnace oil is being used for thermal power generation and these thermal power plants
were being converted to Gas systems and also the availability of hydro power during
these years caused lower demand of Furnace oil. This demand is expected to increase
about 17 percent during 2010-11. It is expected to further increase to around 19 million
tones by the year 2017-18. Local refinery production during 2003-04 was about 10.27
MTOE. The deficit products import were 5 MTOE in 2003-04 while it will remain about
5-6 million tons per annum up to year 2010-11. It is expected to increase to a level of
around 8.0 million tons per annum by the year 2017-18 [EIA 2006, OCAC, World Bank
Report].
In total Pakistan has three older hydro skimming refineries and one mid country refinery
named Pak-Arab Refinery (PARCO) which started its operation in year 2000 and a
Bosicor Pakistan Limited which started its operation in 2003. Together the major five
refineries have a total capacity of 12.82 million tones per annum, and processed 11.33
MMT of crude in the year 2004-05. Share of each refinery in countries refinery capacity
is explained below with total capacity of 12.8 MTOE per year. According to figures from
ministry of petroleum, in the year 2004-05 refineries have processed about 26 percent
local crude oil and 76 percent imported crude oil which is explained in figure
Major Refineries and Their Capacity
Currently there are about five major refineries operating in Pakistan, which are
explained below:
- Pak. Arab Refinery (PARCO) with refining capacity of 4.50 MTO (2005-06);
- Attock Refinery (ARL) with refining capacity of 1.80 MTO (2005-06);
- National Refinery (NRL) with refining capacity of 2.70 MTO (2005-06);
- Bosicor Pakistan Limited (BPL) with refining capacity of 1.50 MTO (2005-06);
- Pakistan Refinery Limited (PRL) with refining capacity of 2.20 MTO (2005-06);
- Dhodak Refinery Limited (DRL) with refining capacity of 0.12 MTO (2005-06).
The refineries produce a full range of products, including lube base oils and asphalt.
However, only 60 percent of their production is HSD and FO, resulting in a significant
mismatch between refined product output and market profile. Pakistan exports surplus
gasoline and naphtha, and is self-sufficient in other petroleum products, such as kerosene
and aviation fuels [Ministry of Petroleum Pakistan].
In the figure below percentage part of each refinery is described:
Consumption of Refined Petroleum Products and Their Future
Oil consumption of different energy products is dominated by Gasoline and Fuel oil.
Gasolin in Pakistan consists of High speed diesel (HSD) and Light speed diesel oil
(LSDO). While fuel oil is normally used in terms of furnace oil which is being used for
thermal power generation projects
Transport sector and agricultural sector are the two major users of Gasoline.Transport
sector include both private and commercial types. In the recent years a high amount of
subsidy was being provided by the government of Pakistan over gasoline due to which its
consumption has increased .but in the recent scenario increase in oil prices in
international market has also effected Pakistan economy due which government is no
more in a position to provide same amount of relaxation on gasoline as before some years
due to which government is gradually reducing the subsidy levels as result Gasoline
prices are increasing locally also and effecting the consumption. Secondly government is
promoting the compressed natural gas (CNG) sector in Pakistan and both encouraging
and forcing the transport sector to convert on CNG. This indicates that in the coming
years Pakistan will see reduced consumption of Gasoline products. But there is no
alternative of Gasoline in Agriculture sector and as a result, this sector is facing extreme
difficulties due to rise of Gasoline process.Furnace oil or fuel oil is normally used for
production of Electricity via thermal power plants. As 1999-2004 Pakistan has surplus of
electricity and during this period most of the oil based power plants were converted to
Natural Gas based systems so there was decline in Furnace oil consumption. But at the
moment country is facing extreme energy crisis and government is Planning for short
term power generation plants that are oil based and also encouraging independent power
producers to invest in the country. As all the new thermal power plants are oil based and
also country has now very limited natural gas resources the consumption of furnace oil
will also increase in the coming years [World bank report].

FUTURE DEMAND OF DIFFERENT PETROLEUM PRODUCTS:

Future Refinery Projects
There are several projects that the government of Pakistan is undertaking to meet the
increasing oil product demand of the country .A few of which are explained below

Pak-Iran Refinery Project

As refinery products are not fulfilling the countries demand so Government of Pakistan is
planning new Refinery projects one of them is Pak-Iran Refinery project. The
governments of both countries are discussing over possible construction of six million
tons coking refinery close to Hub near Karachi. It will be able to process the Iranian
crude oil and 60 percent of its production will be HSD. But still there are discussions
going on and it is hoped that it will finalised till the end of 2008.

Khalifa Coastal refinery (KCR)

An investment company of United Arab Emirates have planned to establish an oil
refinery in costal area of Balochistan named Khalifa Coastal Refinery (KCR). Till now
this will be largest investment in oil and gas sector in Pakistan. This refinery will have
the capacity of producing 35 to 45 million barrels per year of HSD. KCR will not only
help in meeting the increasing demand of the petroleum products in the country but also
help in developing the several downstream industries in a modern way. The refinery will
be completed and accomplished till the first quarter of 2011.

ANALYSIS OF HIGH OIL PRICES ON PAKISTAN’S ECONOMY:

Introduction:
Demand, supply and speculative factors, and their interrelationships
have all led to a steady rise in oil prices until 2008.The low level of
stocks in industrial countries and their rebuilding in a period of supply
uncertainty also contributed to increased demand. This was primarily
because there was a high risk premium on oil, since supply from main
producers was considered unstable.Geopolitical uncertainties and tight
market conditions encouraged speculative funds to enter the market
and further push up prices in the short term (ADB 2004). This trend
affected the macroeconomic variables of Pakistan’s economy
negatively.

Pakistan’s Oil Dependency:

According to Malik (2008), a country's vulnerability to oil shocks can be
seen Through a number of indicators. Firstly, the oil self sufficiency
index, which is calculated as the difference between oil production and
oil consumption divided by oil consumption. This ratio is negative for
oil importers (with -1 being the extreme value). Pakistan had a value of
-0.79 in 2005-2006, indicating its high susceptibility to oil shocks.
Secondly, Vulnerability to rising oil prices also depends on the intensity
with which oil is used. The intensity of oil use in energy consumption
index measures the share of oil in an economy's primary energy
consumption. Pakistan had a value of 0.32 in 2005-2006, showing
slight decrease from the past due to shift towards alternatives. Thirdly,
Energy Intensity measures the energy intensity for an entire economy
(measured as percentage change in energy consumption divided by
percentage change in GDP). A decrease in energy intensity is
considered as the most promising route for reducing vulnerability to oil
shocks (Bacon and Kojima 2006). For Pakistan, this has remained more
or less constant at about 0.9 in 2005-2006, showing that there has not
been much improvement in this area. Finally, the net oil imports in
GDP represent the magnitude of the direct effect of a price increase.
Pakistan had a value of -5.24 in 2005-2006. Hamilton (2005) argues
that a potential macroeconomic effect of oil price is on the inflation
rate as long run inflation rate is governed by monetary policy, and so
ultimately it depends on how the central bank responds to oil prices.

The Dynamics of Pakistan’s Energy

Economic Problems:
In Pakistan, household and industrial demand for energy products,
such as kerosene and gasoline, is highly inelastic (Burney and Akhtar
1990).A rise in the price of oil by 100%, led to an increase in demand
of 19% over the period between 2003 and 2007. This denotes low price
elasticity – the percentage change in quantity demanded/consumed,
divided by the percentage change in price- meaning the demand for oil
in Pakistan is relatively inelastic to changes in price. The low price
elasticity tells us that as prices rise there is limited or no effect on
demand, thereby increasing the monetary (Dollar) amount of quantity
consumed. Thus the net import bill consists of the 100% increase in
price of
oil, in addition to the 19% increase in oil consumed. In Pakistan, major
import cost in theenergy sector is the cost of importing (85%) oil and
its products and these are mainly used in the transport sector. The
difference between the consumption and the domestic production of oil
adds to the import bill of Pakistan leading to a growing trade deficit.
The Balance of Payments of Pakistan has shown a growing trade
deficit, increasing from
approximately $5 Billion in 2005 to over $20 Billion as of 2008. This
destabilizes the macroeconomic fundamentals of the nation.
Price of Oil and Trade Deficit:
As the price of oil increases, the value of imports rise, causing a
negative impact on the trade deficit. Asian Development Bank, ADB
(2005) has estimated the impact of high oil prices on the net import
bill. By assuming 75% rise in oil prices (approximately the increase in
prices between the start of 2005 and end August), the estimated
impact on the net import bill for Pakistan was almost - 4.17. Similarly,
the percentage point growth in exports that was needed to pay for a
75% rise in the cost of imported oil was potentially very large (i.e., 18
%). The government failed to improve the export performance which
also explains that the causality of such a scenario runs from the macro
economy to the oil
markets. The main issue is the effect of rising prices on the national
economy and the corresponding changes within the economic model.
Rising prices of oil have caused increased unanticipated inflation, and
lower economic growth, with a negative impact on the economy. This
can be shown through a simple macroeconomic

model:
GDP = Y = C + I + G + (x-m), where
C= consumption, I= investment spending, G= Government Spending,
x= exports, and m = imports. As price of oil goes up, inflation
increases as price of every item in the basket of goods rises. The
increased prices lead to lower discretionary incomes which leads to
less C (consumption), hence decreasing the total amount of Y (GDP).
The other effect of rising oil prices is that as oil prices go up, and as
Pakistan is importing majority of its oil, there will be a rapid increase in
the value of m (imports), leading to an increased trade deficit, hence
lowering the trade balance, or creating a trade deficit which will result
in lower Y (GDP).The approach used here to measure andquantify GDP
is the expenditure method.The whole economy is divided into 2 sectors
according to the official FederalBureau of Statistics division in
Pakistan;Production Sector, and Service sector.

Empirical Outcomes:
Price of Oil and National Income accounting

Verifying the simplified analytical model mentioned above, one finds

very similar results to what actually happened in Pakistan during the
period when oil prices rose exponentially. The numbers from the
following table showing the GDP (Y) of Pakistan, the total Consumption
Expenditure I, Investment (I) & Government Spending (G), and the net
Exports (x-m) were used for analysis.

Increase in Value of Imports

Here it is seen that the GDP has been steadily increasing at the given
prices from year to year. Comparison between the balance of trade in
2007 and 2008 shows the rate at which the trade deficit increased was
(20.59-13.45)/13.45 = 53%. In 2007, it is seen that: Y=C+I+G+(x-m),
so Y= 120+32.35+ (16.05-29.5) = $138.9 Billion With Investment and
Government spending (I+G)=32.35 In 2008 the value of m increased
(high oil prices), leading to a negative effect on the growth of Y.
Unexpectedly the value of imports rose to $40 Billion. The GDP rose
but at a decreasing rateY=129.78+35.46+ (16.05-40) = 140.65
($BILLION) With Investment and Government spending (I+G) =35.46
GDP growth rate fell from 17.9% in 2005, to 4.1% in 2008. It is evident
here that a rise in the oil price translated into a growing trade deficit
which is seen above with the growth of imports (35.3%) being much
higher than the growth of exports (7.8%) between 2006- 2008.
Oil Prices and GDP Growth Rate:
So an increase in oil prices squeezed income and demand. At a given
exchange rate, more domestic output was required to pay for the same
volume of oil imports. This led to domestic currency being depreciated
in response to induced payments deficits, which further decreased the
purchasing power of domestic income over imported goods. As
important trading partners were also likely to suffer income losses,
slower growth of external demand aggravated these direct impacts.
Higher oil prices also reduced aggregate supply, since rising
intermediate input costs swept producers’ profits and made thembcut
back on output. Lower profits resulted in a decline in investment
spending, which finally caused potential output to fall over a long
period, Malik (2008). This shows that a rise in the value of imports led
to a fall in the growth rate of Gross Domestic Product, in nominal
terms. As oil is predominantly imported in Pakistan, the rise in the
price of oil, increases the value of imports (m) leading to a negative
impact on the growth rate of national income(Y).

Linkage between Oil Prices, Inflation, and lower GDP growth:

Increased imported oil prices caused inflation, as the costs of
production, storage, and distribution rose. Increased inflation lowered
the buying power of consumers in addition to lowering discretionary
income left (after buying more expensive energy) with households to
spend on other goods. This led to lower growth in consumption
spending, further weakening the economic outlook of Pakistan. The
following table shows that although total consumption spending did
grow, the change in percentage terms declined in Pakistan. Proving
that higher oil prices are leading to lower economic growth, as lower
growth in consumption (C) means lower growth in GDP (Y). In addition
to lower consumption growth, higher growth in imports (m) further
deteriorated the situation,

Summarized Negative Affects of Rising Oil Prices on Pakistan:

So the high price of oil has had 2 major macroeconomic affects on the
economy
of Pakistan.

Effect 1
Increased Imports (oil price) leading to a decreased trade balance or
an increased trade deficit as follows. Trade deficit was expected to
reach $9-10 billion by the end of 2008 (Khan 2008). It is interesting to
note the similarity between the following two perceptions. The Dutch
disease concept says that in the long run a country’s dependence on
its natural resource exports diminishes its economic growth due to
increased imports and decreased exports. Similarly in Pakistan’s case
the high oil prices led to high oil import costs resulting in increased
trade deficit and diminishing Pakistani GDP. The literature reviewed for
Pakistan does not provide much substantial evidence that high oil
prices increased the returns from the exporting sectors and thereby
enhanced GDP growth. However, Malik (2008) suggests reasons for a
spur in GDP growth even in the presence of high oil prices in Pakistan.
One reason was that consumers had been shielded by limiting the
direct pass through to final oil prices using extensive fuel subsidies and
strong foreign reserve position at that time. In addition, the continued
strong performance of the services sector had made contribution to
the GDP outcome. On the demand side it was the consumption
expenditure that had proved to be the main source of growth in GDP.
The credit flow to private sector in the form of consumer financing
played a significant role.
Effect 2
Increased imported energy prices have led to increased prices in
Pakistan leading to increased inflation. Increased inflation decreased
the discretionary income of households, leading to decreased
spending. Decreased discretionary spending resulted in slower
consumption growth
Conclusions
Import of the crude oil and oil based product put a lot of burden on the countries
economy. There are currently five major oil refineries operating in the country which are
not able to fulfil the demand requirements, hence the government should take some vital
steps in policy matters so that it can attract more foreign investors not only in
downstream sector but also in upstream sector. Indigenous resources of gas, coal and
hydro should be properly utilised for power generation. These resources should be
actively promoted to reduce dependence on imported crude oil, and to reduce heavy
burden on foreign exchange resources.In addition if the government takes bold and firm
steps to improve hydel power generation, then it not only adds higher value to power
sector, but also shows its impact on oil import budget. This will also help in supplying the
power at cheaper rate for both industrial and residential sectors Consumption of HSD in
the country has grown dramatically due to lower prices and lower taxes while gasoline
experiences higher taxes and higher prices. Promotion of CNG has also affected the
motor gasoline market in recent years.
The government should rationalize taxes and prices of transport fuels to reduce the
differential between motor gasoline and diesel prices and to rationalize price of CNG and
motor gasoline. Due to Indigenous reserves of Natural gas in the country government
should encourage the transport sector to switch over to CNG. As transport sector is the
mainuser of High speed diesel (HSD) and conversion of HSD to CNG will reduce import
billof the country. Refineries face severe problems in transportation of oil from ports.
Moreoptions of transportation of crude from ports should be available for
 refineries.Government policy of using the locally available crude at any cost should be
years IMPORTS (000)BARRELS PRODUCTION (000) BARRELS CONSUMPTION(tones)

1971 22781 3007 2,782,448

1972 22683 3061 2,865,859
1973 24240 2854 2,958,559
1974 21177 2443 3,413,614
1975 21548 2512 3,242,123
1976 21733 3643 3,386,937
1977 25790 3538 3,600,505
1978 26587 3710 3,890,739
1979 28707 3557 4,151,365
1980 30109 3554 4,300,898
1981 32755 3956 4,847,253
1982 31193 4738 5,514,418
1983 31996 4883 6,100,195
1984 29937 9522 6,615,743
1985 29291 14348 7,056,782
1986 2766 14999 7,728,191
1987 28003 16310 8,528,578
1988 26894 17069 9,059,315
1989 26064 19520 9,972,457
1990 28178 23487 9,961,273
1991 30016 22469 10,982,968
1992 29407 21895 12,011,846
1993 30770 20675 13,225,581
1994 28386 19858 13,960,167
1995 31044 21063 15,601,081
1996 28588 21270 15,605,966
1997 29826 20543 16,624,405
1998 32855 19986 16,647,751
1999 32938 20395 17,767,821
2000 52505 21084 17,647,898
2001 51982 23195 16,960,088
2002 52512 23458 16,451,954
2003 57699 22625 13,421,113
2004 61161 24119 14,671,260
2005 63546 23936 14,626,684
2006 60694 24615 16,847,131
2007 62189 25603 18,080,419
technoeconomicallyevaluated before taking any final decision. Refineries should be taken
intoconfidence before finalisation of any crude oil import
Dependent Variable: Y
Method: Least Squares
Date: 05/16/10 Time: 22:24
Sample: 1971 2007
Included observations: 37
Variable Coefficient Std. Error t-Statistic Prob.
C -66.7345563491 1538.68578703 -0.0433711397815 0.9656594002
64

I - 0.0548161076908 -0.227980607707 0.8210268439

0.012497009543 46
5
P 0.001497050056 0.0001398340256 10.7059068746 1.9765633663
41 42 5e-12

R-squared 0.849207470223 Mean dependent var 14527.027027

Adjusted R-squared 0.840337321412 S.D. dependent var 8770.4921516

7
S.E. of regression 3504.49681598 Akaike info criterion 19.239086228
9
Sum squared resid 417570929.729 Schwarz criterion 19.369701194
8
Log likelihood -352.923095235 F-statistic 95.737680209
3

Durbin-Watson stat 0.287521013942 Prob(F-statistic) 1.0775987102

8e-14

REGRESSION EQUATION:

Y=-66.734-0.012I+0.00149P

Y=consumption of petroleum
I=imports of petroleum
P=production of petroleum

Conclusion of Regression Equation:

As our expectations the value of imports and production of oil is significant so it shows
that the consumption greaty depend upon the imports and production of oil.this shows
that change in these two variables will effect the consumption. The value of adjusted r-
square is 0.84.
 REFRENCES

• Energy Information Administration, (2005-06) Energy Information

http://www.eia.doe.gov/cabs/Pakistan/Background.html

• Ministry of Petroleum and natural resources Pakistan,

• http://www.mpnr.gov.pk

• The Oil Companies Advisory Committee (OCAC),

http://www.ocac.org.pk

• http://www.finance.gov.pk/admin/images/survey/chapters/15-Energy09.pdf
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