Silver lining in the fuel crisis

A fuel shortage has been reported recently in various regions of Pakistan, causing inconvenience to many commuters, particularly in Punjab

The government attributes the crisis to hoarding, which has been triggered by speculation of a substantial increase in pump prices

That being said, the fuel crisis presents an opportunity to trigger a transformative change and strengthen the country’s energy security for a more secure and stable future

At present, it appears that there is no actual fuel shortage, as evidenced by 29 days of diesel and 21 days of petrol reserves available in the country

Nonetheless, the current state is not ideal

Refineries frequently halt operations and PSO recently experienced the cancellation of an oil shipment

The root of these difficulties lies in the dwindling foreign exchange reserves, which dropped recently to a nine-year low of under $3 billion, enough to cover less than a month of imports

This creates legitimate concerns for the country, which incurs approximately $1

3 billion in monthly expenses on procuring crude oil and fuels from international markets

Therefore, the recent shortage of fuel, artificial as it may be, serves as a warning of adverse events that may ensue if policymakers fail to intervene and the business environment continues to get worse

The latest episode also goes to show the important role regulators must play

Instead of waiting for a crisis to unfold, proactive measures should be taken to prevent its occurrence

Additionally, the recent crisis also underscores the importance of maintaining ample fuel supplies and making preparations in advance for unforeseen events

There is no denying the fact that oil companies are encountering difficulties in ensuring sufficient and timely supplies

For months, these companies have expressed frustration over the limitations on settling Letters of Credit (LCs) for crude oil and petroleum product imports

The government imposed severe curbs on imports to arrest the decline in foreign exchange reserves, but it has had a profound impact on all industries, particularly the petroleum sector

Pakistan, however, could be inching closer to signing an agreement with the IMF for the release of $1

1 billion in financial aid

This could greatly aid in lifting the forex reserves, given assistance from different countries is also contingent upon the IMF deal

Policymakers, however, must remain vigilant and ready for potential worst case scenarios, even if the situation improves and the likelihood of crisis decreases

It is important to ask difficult questions such as what will occur to fuel supplies if the country’s foreign exchange reserves continue to decline? How will the oil industry function under more stringent restrictions on opening LCs? And, in a catastrophic scenario, what will happen to the petroleum sector if the country experiences bankruptcy and how will the scarcity of fuel impact the broader economy? These questions require a careful examination

Pakistan relies heavily on imports to meet its requirements of petrol, diesel and other fuels due to low levels of production from the local oil fields

Put simply, the country doesn’t have enough oil reserves to meet local demand, although when it comes to exploration, no stone should be left unturned

It is imperative that the oil exploration and production companies like OGDCL ramp up exploration work and increase their output, which has been declining

The domestic oil that is supplied to local refineries caters to just 20% of the fuel demand

Even if banks refuse to open LCs for crude oil imports, refineries will continue producing fuels after processing local crude, although supplies will get severely restricted

Then there is the deferred oil payment facility from Saudi Arabia, through which $100 million worth of crude oil can be purchased every month

This could meet another 20% of the demand

This means that in a worst-case scenario, Pakistan can meet just 40% of its oil requirements

This significant gap between supply and demand needs to be reduced since it poses a threat to the energy security

The impact of a major economic crisis can endure for years and be widely felt throughout all sections of society

With inflation already at exorbitant levels of 27

6%, it has the potential to escalate even further

The pressure on businesses can lead to their downfall, with a decrease in revenue across all sectors of the economy, including manufacturing, agriculture and services

This, in turn, results in job losses and an increase in poverty levels, which is a recipe for social unrest

The global financial crisis of 2008 serves as a reminder of the ramifications that can occur

The exacerbation of the already dire situation due to a fuel crisis can only compound the problem

Policymakers should, therefore, implement measures to maximise the utilisation of local oil refineries, even at times of crisis

This may involve expanding the deferred oil payment facility from Saudi Arabia or entering into government-to-government agreements with other oil-producing nations to diversify and secure sufficient supplies

The government has been actively negotiating a deal with Russia to obtain crude oil and refined petroleum products at a substantial discount

However, the objective should not solely be to obtain inexpensive oil, but also to strengthen the energy supply chain

The recent fuel crisis presents a chance to enhance energy security

Policymakers should seek to fortify the oil refining industry and, as a result, the broader petroleum sector

By reducing the vulnerability of the local energy market to both internal and external shocks, the country can be made more resilient

This crisis should not be viewed as a waste but as an opportunity to drive positive change

The writer is a corporate consultant who writes on subjects of business and economy   Published in The Express Tribune, February 20th, 2023

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Date:21-Feb-2023 Reference:View Original Link