Government of Pakistan has almost reduced the prices of petroleum products by 30% in the last month or so which is entirely due to a 50% decrease in the oil prices globally.
But in recent weeks, major cities of Pakistan have been facing a serious fuel shortage issue. What are the reasons behind this shortage? PMLN’s bad governance? No.
There is a greater game involved here. I will explain this in two phases;
Phase one will demonstrate why there was a drop in oil prices globally and phase two will reflect on the possible outcomes of this reduction, mainly the shortage of oil.
Phase One (December):
Like any other commodity, oil prices are also determined by Demand-Supply principle and to some extent by expectations as well (as “The Economist” also indicated).
- Economic activity being low and dependence of majority of countries on alternative sources of energy resulted in a low demand, which led to a reduction in prices.
- Believe it or not but now USA is the largest producer of oil (although it doesn’t export crude oil) and has become self-sufficient in this department, hence no imports and increased supply of oil for rest of the world (hence, as the pressure on demand side of oil decreased because one of the biggest economies backed off on imports of oil, the prices fell).
- Security issues in Libya and Iraq didn’t affect the oil production of these countries which remained firm at combined 4 million barrels a day, hence there was no pressure on supply side (with one major importer of oil out, there is a surplus of oil, hence fall in prices).
- Hatred of Saudis and Gulf partners towards Russia and Iran forced them not to forego their market cut (which could have made it impossible for prices to fall if Saudis had stopped the production) hence no change in production from Saudis and their Gulf buddies made it possible for a drop in price of oil. So, by now everything seems to be fine. Everyone being happy except Russia, Iran, Nigeria, Venezuela et al because their economies heavily rely on oil production and export and a glimpse of their frustration can be seen in plunging Ruble.
Phase Two: (Mid January):
Now, as oil prices are based on Demand-Supply principle similarly investment in oil sector rests on marginal returns principle as well. So, due to a 50% fall in oil prices most of the oil rigging companies in USA, Canada, Russia, Venezuela et al have suspended their operations (because it’s better not to produce than to produce at a 50% loss).
In USA alone in the last 5 weeks there has been a drop of 154 in crude oil rig count which is the highest fall since second month of 1991. So, when an economy as large as USA observes the highest drop in oil rig count in the last 24 years, one can automatically assume that they are (and in coming months) not self sufficient anymore, hence they will import oil at cheap rates from the market rather than rigging it out themselves on loss. And any oil producing country’s (exporter’s) first preference will be the USA and when a large economy like USA will import oil from the market in times when oil rigging has been suspended by a lot of countries, there will be a shortage of oil in the market.
USA was just an example (because demand of oil by USA alone cannot change the oil market), other big industrial countries like China, India etc. will still be consuming oil at the same rate as before, so the decrease in demand of oil that was observed in December was short lived and there is a shortage of oil, which can very clearly be seen in the case of Pakistan.
Pakistan had to face a two tier demand problem in this case. Firstly, an increase in the international demand for oil and obviously due to lack of economic activity, Pakistan falls way down in the preference list of oil exporters. And secondly, due to suspension of CNG operations and shortage of Natural Gas coupled with 30% drop in petroleum prices, an increase in the domestic demand. So, that’s the story behind your car’s empty fuel tank. It’s certainly not because PMLN rigged the elections; it’s because enough oil isn’t being rigged around the world.
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