Although oil was discovered by the Chinese in 600BC, in modern times it was discovered in the US in 1859. The Spindletop discovery in 1901 in Texas created the oil economy that has taken the world in its grasp ever since. The use of oil and petrol and the advent of the internal combustion engine go hand in hand. Mobile machines run on petrol, the refined product of oil, while stationary machines on electricity that is also produced mainly from oil.
As industrialization produced bigger and faster machines for the production and distribution of goods and services for the satisfaction of ever-increasing populations of the globe in all continents and communication, the dependence on oil and its byproducts increased. Thus the dependence on oil started for the world. This dependence had multiple economic and political impacts on world diplomacy, economics and politics as well as on the environment. On one hand, we are improving our lifestyles and income levels, but, on the other hand, our dependence on these fossil fuels was leading to the rapid deterioration of air quality. The health of our planet is suffering because these new combustion techniques were transforming breathable air into non-breathable air, resulting in pollution, global warming and climate change. The use of oil in both electricity and transport is the major cause of these pollution levels.
Although the world prices of oil are measured by Brent oil from the Brent Sea on the other side of England (UK), the top five producers and exporters of oil are the US (20%), Saudi Arabia (11%), Russia (11%), Canada (6%) and China (5%). The top ten producers of oil produce 72% of world oil with a collective output of almost 69 million barrels a day. OPEC is a cartel of oil-producing and exporting counties that produces and exports more than 60% of world oil and therefore controls the supply and subsequently the prices of oil. OPEC plus is a recent agreement with other non-OPEC oil-producing countries that include Russia and now determines the world politics and supply of oil around the world.
The dominance of oil prices on the world stage came after the import of oil from Gulf nations to the US and is called petrodollars, or a surge of dollars earned by oil-producing Gulf states that are in US banks and are considered a loan by Saudi Arabia and OPEC to the US. This increased the dominance of OPEC countries in world politics and economics substantially.
Although prices of crude oil fluctuated and usually had an upward trend, in 2021 the world economy closed down due to COVID-19 and in April 2022 when this economic activity was reviving from the aftermath of the lockdown, Russia attacked Ukraine and started a cold war with the US and NATO that led to an adverse impact on world prices of food, freight and oil and gas that Europe and many other nations import from Russia or Ukraine. The prices of crude have reached almost $116 per barrel, which is $30 higher than when this war began.
Pakistan is a net oil importing, debt-ridden, relatively poor economy where in march 2022 its GDP growth had reached $380 billion and a growth rate of 6% increased per capita income to $5,452. Pakistan’s external debt is $66 billion.
In April this year, Pakistan’s trade deficit reached minus Rs692.5 billion, with Pakistan’s exports at Rs531.7 billion and imports at Rs1,224.2 billion. Oil and petroleum products are number one on Pakistan’s import list with a share of 27%, followed by electric and non-electric machinery at 16.3%. Vehicles have a share of 4.6% of Pakistan’s imports – all contribute to the increase in the consumption of petroleum products in Pakistan. The prices of petrol products have been steadily rising, and affecting the prices of all consumer items in the country creating cost-pull inflation, so the PTI government froze these prices at Rs155 per litre. This PML-N government with two subsequent increases of these prices of Rs30 each in two weeks has made petrol and diesel available to the public at Rs210 and Rs204 respectively. There is a general uproar in the country. Prices of commodities and transport have skyrocketed and have reached almost 14% – the highest in two years. Transport and cost of living have increased by 20%, thus eroding the gains that had been achieved by a 6.0% growth rate.
Although the Sindh and Balochistan governments have reduced the supply of free petrol to their ministries and employees by half, the federal, KP and Punjab governments have not yet come up with some viable options for austerity. It is ethically and financially not right that when the general public has to buy oil-related products at a much higher price, there are influential people in the government institutions that receive free petrol and other products at the expense of the taxpayer.
What is important to note is that till the time Pakistan learns to produce electricity from its domestic environmentally friendly sources, its dependency on the import of foreign fossil fuels will not come down. Till the time Pakistan and its upper middle classes learn to stop driving expensive cars run on fossil fuels and start commuting on electric buses and intercity transport systems, its dependency on foreign oil will not diminish. Till such time we find ways to use foreign LNG, our imports would not decrease and our trade deficit would not decrease. US dollar has reached almost Rs200 and above in the open market, prices of gold have increased, prices of petrol have reached Rs210 and the upward trend is not stopping, but the opportunity of earning honest income for lower middle classes and the poor, venerable people in the country are fast diminishing. The purchasing power of the rupee has diminished by 15%, and interest rates have increased to 13.5%. How would the households survive and how would the local business survive, this affects both demand and supply in the country further contracting the markets. The government does not have an economic policy and is going to increase taxes on the people. The future is bleak and smells of political disaster because of these economic downturns.