Pakistan’s new government has done well to hike oil prices and reduce the charity given to the rich

Pakistan’s government has finally mustered the courage to raise oil prices in the country. The first hike was announced in May, more than a month after the new government took over, and the next raise came on June 2.

Pakistan is already in political disaster mode and is experiencing a balance-of-payments crisis. Was the government’s fear of raising prices rational? Should the country be more afraid of impending rises in the price of oil or its non-availability or both? Just before its exit, the Imran Khan government had brought down oil prices, a move which the next administration was reluctant to reverse. Should the country feel lucky at this purported benevolence of its leaders?

We do not live in a world of fairy tales. There is no goose laying golden eggs. Oil is extracted after monumental exploration, huge investment and the challenging work of drilling. Often there is a disappointment when no oil is found. When prospectors drill 10 wells, oil or gas is struck in only one. This is the world average.

The country is incredibly lucky as its investors struck oil in one out of four wells. Despite this advantage, Pakistan’s indigenous production of crude oil was only around 77,000 barrels per day during the fiscal year 2020 (the yearly total was 28.1 million barrels). Pakistan imported 6.7 million tonnes of crude oil. Both indigenous and imported crude were processed in Pakistan’s refineries to produce petroleum products of 9.7 million tonnes.

Elite capture

Pakistan’s consumption of petroleum products (diesel, petrol and hi-octane) was 17.3 million tonnes. Pakistan imported 7.5 million tonnes in fiscal year 20 to meet its needs, according to the Pakistan Energy Yearbook 2020. This import quantum was 10.9 million tonnes, according to the Pakistan Bureau of Statistics, and cost $4.7 billion.

The data discrepancy aside, the crucial point is that the international price of oil varied between $22 to $66 per barrel in fiscal year 20 compared to $78 to $110 per barrel in fiscal year 22 representing a rise of 67% in two years.

Pakistan’s consumption of crude and refined petroleum products has also risen. Consequently, Pakistan’s import bill of petroleum group (crude, refined, LPG, LNG) has already reached $14.5 billion for the period July to April (fiscal year 22) compared with $7.6 billion in the corresponding period in fiscal year 21. Price effect dominates in this bill, but the import quantum that could reveal the exact price and quantum effects has yet to be compiled.

So, Pakistan’s government had until now been buying oil at expensive rates and selling it cheaply. One does not have to be smart to see this folly. By keeping domestic oil prices low, the government had implicitly been doling out its borrowed resources to the comparatively rich consumers of oil.

Indeed, poor consumers also benefited as they indirectly used oil by riding buses, as they owned neither cars nor motorbikes. But the non-poor were receiving needless and shameful charity. In the context of Pakistan’s economy, this is not just the story of subsidy through oil prices, which fuels consumption and benefits the rich, it is also about the direct and indirect subsidies to sugar barons, textile barons, rural barons and real estate barons, creating a robber baron elite which has captured the real surplus value by exploiting human and other resources in Pakistan.

Many ordinary Pakistanis may not have heard the term “elite capture”, but they know what it is as they are the ones who are suffering the most because of it.

How are these surplus values created? Take the example of real estate as this is the predominant system in the capture of surplus value in Pakistan. Poor people have neither land nor money. The not so poor may have some bequeathed land if not money. Shrewd barons buy land lots cheaply and sell them at high rates, producing almost nothing in the process except exorbitant profits for themselves on which taxes are easily evaded.

I need not dwell on who the real estate barons are. Suffice it to say that most of them are the worst among the robber barons because they are unproductive. Even sugar barons seem better because they produce something. The same goes for other industrial barons.

Cutting down dependency

What is noteworthy here is that the prices of goods play a key role in creating value. The rise in sugar price incentivises sugar producers to produce more. The rise in sugar cane incentivises farmers to grow more sugar cane. While the consumers suffer, producers and investors gain because of the rise in prices. Irrespective of whether the price increase is market-driven or manipulated, this is a boon for producers and a bane for consumers.

We need to see the rise in international oil prices in this context also, even as we lament its impact on family and government budgets. Elevated crude oil prices increase the profitability of exploration and drilling. Not only does the likelihood of new investments in the petroleum sector rise, more extraction of oil also becomes possible.

In this way, the price increase gives an opportunity to Pakistan to incrementally move towards self-sufficiency with less dependency on imports. This analysis applies equally to wheat prices. Higher wheat prices are disliked by consumers, but growers like higher prices.

Therefore, the government has a system of support prices to persuade farmers to grow more wheat. Will international oil prices remain elevated in the near future? Had the war in Ukraine not occurred, oil prices would not have risen much. Is the conflict in Ukraine likely to end soon? The history of past conflicts tells us otherwise.

Hence, it would be better to assume elevated future prices of oil and wheat (30% of the world trade in wheat involves Russia and Ukraine). Keeping oil or wheat prices low (through subsidies) in this situation is counterproductive and can reduce the output of oil and wheat.

Moreover, the Pakistani government does not have gold coins to distribute. It has, therefore, wisely though reluctantly, allowed domestic oil prices to rise. It should now focus its energies on ending the remaining subsidies, strengthening the balance-of-payments position and shoring up its reserves.

According to Shakespeare, “Things done well and with a care, exempt themselves from fear.”

This article first appeared in Dawn.