Oil prices jumped nearly 10% in Monday’s early session after Iran launched a barrage of retaliatory missiles and drone strikes targeting Israel and U.S. bases in the Persian Gulf following the killing of Iran’s Supreme Leader Ayatollah Ali Khamenei on Saturday. And, it could get worse: JPMorgan Chase has warned that Brent crude oil prices could spike to $120 per barrel if the conflict leads to sustained disruption of oil flows through the Strait of Hormuz.
Whereas the Strait of Hormuz has not officially been closed, it is experiencing a de facto closure due to a sharp 70% drop in traffic caused by safety fears, insurance cancellations, and suspension of operations by major shipping lines. Unfortunately, the experts are warning that nations with weaker economies are likely to bear the full brunt of surging oil prices. Analysts are warning that escalating conflict between the U.S. and Iran in the Gulf is threatening to derail a fragile recovery by the Pakistani economy, with the country likely to see increased import bills, a wider current account deficit and severe inflationary pressure.
According to Ehsan Malik, former chief executive officer of the Pakistan Business Council, even relatively modest increases in oil prices could come with major ramifications. Malik says that Pakistan’s current account deficit increases by roughly $1.5-$2 billion for every $10 rise in oil prices,“If prices were to climb to $100, the deficit could expand by $5-$7bn on an annualised basis, potentially undoing recent gains that allowed FY25 to post a $2bn current account surplus,” he told Dawn.
Pakistan produces ~80,000 bpd of crude per day, which meets less than 20% of its domestic consumption. Rising fuel costs typically add 0.5–0.6 percentage points to Pakistan’s inflation for every $10 price hike, thanks to the country’s heavy reliance on fuel imports. This threatens to reverse recent gains after inflation dropped from a nearly 50-year high above 30% in 2023 to around 5.8% currently. The surge was driven by high energy prices, a falling rupee and IMF reforms, putting extreme pressure on the population.
Pakistan imports the vast majority of its oil and gas. When oil prices rise, the country must spend more of its limited foreign exchange reserves, often leading to currency devaluation, which makes everything else more expensive. A significant portion of Pakistan’s electricity is generated through thermal plants that run on oil and Regasified Liquefied Natural Gas (RLNG). Rising fuel costs lead to “Fuel Price Adjustments” (FPA) on utility bills. Further, Pakistan relies heavily on trucking for goods and food transport rather than an integrated rail network. This means that diesel price hikes are immediately reflected in the price of perishables like vegetables and grains.
To exacerbate matters, the Pakistani government frequently raises the Petroleum Development Levy (PDL) alongside price increases in a bid to meet revenue targets, further compounding the cost to the consumer. Pakistan currently imports 85% of its crude oil, 29% of its natural gas, 50% of its LPG and 20% of its coal. The country saw its energy import bill skyrocket to $17.5 billion in 2023, a figure that’s projected to nearly double by 2030.
Thankfully, the country is making concerted efforts to ramp up oil production and cut its fuel bills. Last November, Pakistan awarded 23 offshore oil and gas exploration blocks to oil companies, marking its first such licensing in 18 years as it looks to tap into potential maritime reserves. The Pakistani government awarded the offshore blocks to four consortia, led by major local energy companies such as state-run Oil and Gas Development Co. Ltd (OGDCL), Pakistan Petroleum Ltd (PPL), and MariEnergies, as well as Turkey’s national oil company, Türkiye Petrolleri Anonim Ortakl??? (TPAO). These consortia have pledged an initial $80 million for the exploration phase, with total investment possibly reaching up to $1 billion if drilling proceeds. The successful bids for the offshore blocks cover around 53,500 square kilometres.
The U.S. Energy Information Administration (EIA) has previously estimated that Pakistan may hold over 9 billion barrels of shale oil and 105 trillion cubic feet of shale gas. However, unlocking Pakistan’s offshore hydrocarbon potential will not come cheap, with experts estimating that exploration alone could require upwards of $5 billion in investment. Further, Pakistan needs an estimated $25 billion to $30 billion in investment over the next decade to extract just 10% of its total 235 trillion cubic feet (TCF) of natural gas reserves and reduce foreign exchange outflows.
By Alex Kimani for Oilprice.com