Govt to pass oil price surge fully to consumers

The government on Monday decided to fully pass on the increase in global oil prices due to the US-Israel-Iran war to domestic consumers on a fortnightly basis, as the inflation rate has already jumped to nearly a 16-month peak of 7% in February.

A cabinet committee on monitoring petroleum product prices met here and observed that national oil stocks were at “comfortable” levels. The committee decided that “pricing implications arising from international market movements, where unavoidable, will be addressed through established mechanisms in a predictable and orderly manner to avoid distortions or abrupt adjustments”, according to a statement issued by the finance ministry.

The government sets petrol and diesel prices on a fortnightly basis. Just two days ago, it increased petrol prices by Rs8 per litre and diesel by Rs5.2 per litre. The government is charging up to Rs82 per litre petroleum levy. It cautioned that if the war persisted, it may have implications for Pakistan’s energy supplies.

Finance Minister Muhammad Aurangzeb chaired the first committee meeting, which will hold sessions on a daily basis to monitor the situation. Brent crude, the global benchmark for oil prices, jumped by 10% to touch more than $82 a barrel on Monday after at least three ships were attacked near the Strait of Hormuz over the weekend. Natural gas prices also surged by as much as 25%.

The war has spread to other regional countries and Iran has warned vessels not to pass through the crucial waterway in the south of the country, through which about 20% of the world’s oil and gas is shipped.

On Sunday, the OPEC+ group of oil-producing nations agreed to increase output by 206,000 barrels a day to help cushion price rises, but some experts doubt this would help much.

The committee was informed that national stocks of petroleum products are presently at comfortable levels and can meet the country’s needs for a maximum of four weeks.

But the “committee noted that closure of the Strait of Hormuz and tensions around the Strait of Babb Al-Mandeb are major challenges for global energy security. If the situation persists, then it may have implications for Pakistan’s energy supply chain”.

The committee also discussed alternate supply routes in case the war prolongs and the two critical waterways remain inaccessible. However, some members pointed out high transportation costs if Pakistan diverts supplies away from the Middle East region.

The finance minister emphasised that there is no immediate supply stress and that maintaining market confidence and orderly conditions remains essential. While acknowledging that the international environment is fluid and evolving, Aurangzeb noted that Pakistan’s energy supply chain remains stable and fully functional.

Prime Minister Shehbaz Sharif has constituted the committee to closely monitor futures prices of petroleum products and the predictability of the supply chain in view of the current conflict in the region.

The committee will also determine foreign exchange implications of price volatility for the short and medium term.

Different price scenarios were presented before the committee. It was informed that if prices rise to $100 per barrel, Pakistan’s monthly fuel import bill will increase by another $300 million. In case prices peak at $120 per barrel, the monthly fuel import bill will increase by $500 million.

During the first seven months of this fiscal year, Pakistan imported $9.1 billion worth of petroleum products, which were down by 5% and a reason for the relatively low current account deficit. Pakistan’s economy remains at a nascent phase and does not have the capacity to absorb any external or domestic shock.

The finance ministry said that members reviewed trends in forward and futures prices of petroleum products and assessed the resilience of regional and international supply chains amid the evolving geopolitical environment.

They also examined potential short- and medium-term foreign exchange implications of price volatility and evaluated measures to prevent supply disruptions while ensuring uninterrupted domestic availability of petroleum products. The possible fiscal impact of a prolonged conflict was also considered. A detailed assessment of global oil market conditions was presented, including movements in international benchmarks, freight and insurance costs, shipping route dynamics and alternate sourcing options. Various supply and pricing scenarios were evaluated to ensure preparedness under different contingencies.

The meeting also reviewed LNG and LPG supply positions, shipment schedules, terminal operations and line-pack considerations. Relevant ministries were tasked with refining comparative scenario assessments, including economic and fiscal trade-offs associated with alternative fuel utilisation and demand management options.

The finance minister assured the public and market participants that there is no cause for concern.

Inflation peaks

Pakistan Bureau of Statistics (PBS) reported on Monday that the inflation rate jumped to 7% in February, the highest pace during the past 16 months. In October 2024, inflation had accelerated to 7.2%.

Inflation moved north because of increases in both energy and food prices. Any likely increase in fuel prices due to the war would also make things difficult for the government and consumers, who are forced to pay unduly high fuel taxes.

PBS said that inflation in urban centres increased by 6.8% on a year-on-year basis, while in rural areas it surged by 7.3%.

Core inflation, measured by non-food non-energy, remained broadly stable at 7.1% in urban areas and 8.3% in rural areas.

PBS reported over a 10% increase in electricity charges last month, while tomato prices increased by 82% on an annual basis. Wheat became expensive by 43%, wheat flour by 26%, butter by 16% and fresh fruits by 13%. Gas charges jumped by 23% last month compared to a year ago.