Global oil price decline: Pakistan’s chance to boost revenue, cut debt

By: Syeda Masooma

Over the past five months, global oil prices have fallen sharply, retreating by approximately 20 per cent ($17 per barrel). Currently standing at $72.9 per barrel, this marks the lowest level in 15 months.

Earlier in September, OPEC+ announced a delay in planned oil output increase for October and November, after crude prices hit their lowest in nine months. The organization said that it could further pause or reverse the hikes if needed.

Meanwhile, Fortune Magazine said that even if OPEC+ continues to constrain production throughout 2025, a surplus will still emerge amid subdued demand growth and burgeoning output from the US, Guyana, Brazil and Canada.

“Even a $5 per barrel drop in oil prices could result in a $1.1 billion annual reduction in our oil import bill, which includes crude oil, petroleum products, and LNG.”

Tahir Abbas, Head of Research at Arif Habib Ltd.

The primary causes behind this decline are increased oil supply, rising inventories, and reduced global demand, compounded by concerns over China’s economic slowdown and the looming threat of a global recession, said a report by JS Global brokerage house.

WHAT DOES THIS MEAN FOR THE WORLD? AND FOR PAKISTAN?

For oil-producing nations, the impact of this reduced demand is pretty straightforward. Those countries whose primary or major export is oil, may experience budgetary strains, reduced public spending, and potential deficits.

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For OPEC+, however, this may end up being a double edged sword with a difficult choice – to accept lower prices or to lose market to non-member countries.

On the other hand, the drop in global demand and the corresponding decline in oil prices could provide a much-needed reprieve for oil-importing and developing nations – including Pakistan – offering them a critical buffer amid mounting concerns over a potential global recession.

Reduced oil prices lower the cost of imports, shrink trade deficits, and provide opportunities to rebuild foreign reserves. It may also ease inflationary pressures by reducing transport and energy costs.

Specifically, in the context of Pakistan, Tahir Abbas, Head of Research at Arif Habib Limited, shed light on the potential economic relief from declining oil prices, stating, “Even a $5 per barrel drop in oil prices could result in a $1.1 billion annual reduction in our oil import bill, which includes crude oil, petroleum products, and LNG.”

CURRENT ACCOUNT DEFICIT

Pakistan’s current account deficit (CAD) has already contracted to at an 11-month low in August 2024.

According to latest data released by the Pakistan Bureau of Statistics (PBS), the CAD decreased by 20.5 per cent to $1.68 billion as compared to $2.11 billion a year ago as exports surged and imports fell. This latest drop in oil prices could further help in reducing the CAD by reducing the country’s import bill.

JS Global report estimates that this recent drop in oil prices can potentially decreasing the CAD by an estimated $800 million for FY25. This relief comes at a critical time, as Pakistan grapples with $22 billion in debt obligations for FY25.

INFLATION

Pakistan has recently seen a disinflationary trend, with inflation entering single digits for the first time in almost three years, clocking in at 9.7 per cent in August 2024. This is partly due to lower oil prices. The JS Global report says that over the past six months, “a 5 per cent reduction in petroleum prices has contributed to easing inflationary pressures. Oil prices directly impact the transportation sector, which holds a 6 per cent weight in the inflation basket.”

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The report adds that although the initial effects of declining oil prices on inflation are visible, second-round effects, such as reduced production and transport costs feeding into other sectors, are yet to fully materialise. A continued drop in oil prices could further lower inflation, with estimates suggesting that a $5 per barrel reduction could shave 35 basis points off Pakistan’s inflation rate for FY25.

Even if the government raises the petroleum levy by Rs 10, it won’t substantially affect inflation.

However, Tahir Abbas noted that any further reduction or even a slight increase in domestic oil prices is unlikely to have a significant impact on inflation. “The government has so far managed global oil price fluctuations prudently, passing them on to consumers during both rising and falling trends,” he said.

Looking ahead, he said that projected inflation for September 2024 is around 7.5 per cent. “Even if the government raises the petroleum levy by Rs 10, it won’t substantially affect inflation,” he added.

PETROL PRICES IN PAKISTAN

Both the JS Global report and Tahir Abbas concur that this is an opportunity for the government to, in fact, increase the Petroleum Development Levy (PDL) by Rs 10 per litre. The move is said to possibly help offset a potential shortfall in collection due to sluggish oil marketing company sales. “This measure would allow the government to manage fiscal challenges without significantly impacting inflation, given the limited effect of minor oil price changes on overall price levels”, the report adds.

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Tahir Abbas sheds more light on the matter. “The top limit for Pakistan’s Petroleum Levy is Rs 70, and for now its Rs 60. So there is a possibility that the government increases the PL to Rs 70. This will not impact the reducing inflation but it may help with the government’s non-tax revenue”.

THE FLIPSIDE

As a net oil importer, Pakistan stands to gain a great deal from the global decline in oil prices. But the flipside comes from potential decline in remittances, primarily from oil exporting countries in the Middle East. JS Global report said, “Since 55 per cent of Pakistan’s remittances originate from Middle East – a region heavily reliant on oil income, any prolonged decline in oil prices could negatively impact economies of these countries and hence weaken remittance flows from current levels.”

The World Bank data shows that in 2023, weak economic conditions in Pakistan including a balance of payment crisis and other difficulties have already reduced remittance inflows by 12 per cent to $27 billion compared to the same period in preceding year. With increased pressures from this global oil price decline on such countries, there might be some adverse effects on the remittances to Pakistan as well. While historical data indicates a weaker correlation between oil prices and remittances, it does not entirely eliminate the potential risk.