Low oil prices: bane or boon

The international price of crude oil has plummeted by 50 percent since June this year – a momentum that is not projected to be reversed in 2015. Accusations have been hurled by the two under-sanctions oil exporters namely Russia and Iran against the United States and the West for being complicit with Saudi Arabia in bulldozing the decision not to curtail output to match the decline in demand with the objective of keeping price of oil high during a December meeting of Oil Producing Exporting Countries (Opec). The United Arab Emirates Energy Minister denied this charge at an Abu Dhabi energy forum and clarified that “one of the main causes (for Opec decision to keep output high) is irresponsible production by some producers from outside the [Opec] organisation” – an explanation confirmed by the Saudi Oil Minister who claimed that the global price fall was due to “lack of co-operation by main producing countries outside Opec, misleading information and speculators’ greed.”

Demand for oil has fallen due to the ongoing recession in Eurozone countries and China. According to Opec data available on its website, European demand fell from 13.6mb/d in 2013 to 13.4mb/d by the end of the current year and is projected to decline further to 13.0mb/d in the first quarter of 2015. Asia-Pacific countries demand was 8.3mb/d in 2013 with 8.2mb/d expected by the end of the current year and a projected rise to 8.8mb/d in the first quarter of 2015. Total world demand was 90.1mb/d in 2013 with an estimated 91.2mb/d by the end of the current year out of which 54.2mb/d was supplied by non-Opec countries in 2013 and 55.9mb/d by the end of the current year. And supply by non-Opec countries is forecast to rise to 57.1mb/d in the first quarter of 2015. This data confirms the veracity of the Saudi/UAE position as opposed to the position taken by Russia.

The question is: whether this is good or bad for the world economy in general and Pakistan in particular. There is no doubt that the line between lower oil price and increased prosperity has been blurred by the fact that one of the reasons for the decline in the price of crude is the recession in Eurozone countries and the decline in output in China. In other words, a recession with lower national productivity as well as higher employment levels is evident concurrently with the decline in the price of oil. Be that as it may, the consumers in Europe have certainly benefited at the pump due to lower price of petrol however it is not yet evident that the resultant increase in disposable income would translate into higher consumption that may eventually fuel the wheels of the economy.

It is a good precedence that the Pakistan government did not succumb to the lure of raising its revenue considerably by keeping prices of petroleum products and electricity stable subsequent to the decline in the international price of crude which may have enabled it to meet its budget deficit target. While critics may credit the political climate at the time as the main reason for the decision to reduce petroleum prices and electricity tariffs yet one must give credit where due. Thus Pakistani consumers have certainly benefited from the decline in the international price of oil with the government passing on the decline to electricity consumers as well as at the petrol pumps – the benefit of which unfortunately is largely limited to those who own their own transport as intra-city and inter-city fares have not been commensurately reduced.

However, from a macroeconomic perspective, the country would benefit considerably from a reduction in the price of crude as with petroleum products contributing a sizeable portion to our total import bill the country’s foreign exchange reserve situation would improve and lower the International Monetary Fund’s pressure on our failure to comply with certain Fund conditionalities.