ISLAMABAD: Energy import-led economies such as Pakistan could face serious trouble if Iran shuts down Strait of Hormuz in retaliation for US attack on its nuclear sites. The escalating Middle East tensions may result in a massive hike in fuel prices in Pakistan. Petrol may go up by Rs15 and diesel by Rs20 per litre from July 1, 2025 for the next fortnight. This trend is feared to continue in the fortnight to come. If Harmoz crisis starts, Pakistan will face a massive adverse impact.
Around 20 per cent of global oil passes through the Strait of Hormuz. Pakistan imports about 70-80 per cent of its crude oil, most of it from Gulf countries (e.g., Saudi Arabia, UAE, and Kuwait), all of which rely on the Strait for shipping. It would lead to increased cost of oil as rerouted or limited supply would cause overall inflation, raising prices of basic goods, transportation, and manufacturing inputs.
Pakistan would face tremendous pressure on the balance of payments as the country already has a weak current account. Higher oil prices would deepen trade deficit and put pressure on foreign exchange reserves.
The country may also experience currency depreciation as the increased import costs would weaken the Pakistani Rupee, further worsening inflation.
The top authorities in the Petroleum Division on Monday held a detailed meeting with heads of refineries and oil marketing companies (OMCs) and deliberated on various options to reduce the impact of the Middle East situation and in case of the Strait of Hormuz closure, a senior official told The News.
“In the meeting, various scenarios have been discussed and some doable options are finalised which will be pitched today (Tuesday) in the high-level meeting that Prime Minister Shehbaz Sharif convened at 10 am. The meeting to be headed by the Premier would give a nod to the finalised strategy to keep the impact of the Middle East situation at the lower side.”
Pakistan under long-term agreements imports crude oil, finished POL products from ADNOC of Dubai and Aramco of Saudi Arabia and diesel from Kuwait and LNG from Qatar.
The transportation of fuel trade between the Middle East and Pakistan is carried through the Strait of Hormuz. In case the Hormuz crisis starts and it lasts for days, Pakistan will cope with the situation, but it would have no option but to increase the POL prices in the country because of the continued surge in prices of POL products in the international market.
“Dubai has two ports one is Ras Al Khaima and the second is Fujairah. Pakistan’s refineries import crude oil from Ras Al Khaima port which is linked with Strait of Hormuz. Dubai exports crude oil of three million barrels per day, but if it uses its Fujairah port, its export would reduce by 50 percent to 1.5 million BPD because the oil pipeline to Fujairah has less capacity to export the fuel. Under this scenario, Dubai will certainly cut the supply of crude oil and finished products to all fuel-importing countries which mainly include Pakistan, India, China, Japan and others.
India, China, Japan, BD and other developing countries are importing crude oil and finished products under long-term agreements. However, Dubai may refuse to provide oil to the clients that buy on requirement basis through spot purchasing.
Saudi Arabia has a pipeline in the red-sea also from where it can export fuel. Currently KSA exports crude and finished products of 7 million barrels per day and to avoid the waterway of Strait of Hormuz, it would have to export from the red-sea through its pipeline and in this case, exports of fuel from Saudi Arabia would reduce by 50 percent. So under this scenario, KSA would place the cut on fuel supplies to the countries which are purchasing under long term agreements.”
“This would create a shortage of fuel in all countries which are importing fuel from Middle East countries. Under this scenario, panic buying of POL products may trigger as people would start rationing the fuel and petrol pumps may also go for hoarding.”
If Iran disallows the ships’ transportation in its waters area in Hormuz, then the traffic congestion would escalate manifold in Oman waters area in Hormuz. Under this situation, transportation of goods and fuel would slow down manifold and ships would arrive very late, but fuel products and other goods would be available but at higher prices. If the Strait of Hormuz is closed down, the crude oil price will cross $100 per barrel and may reach up to $130 per barrel.
In case a crisis persists for some days, Pakistan can cope with the situation by running the refineries at optimum level and by asking OMCs not only to maintain their 20 days stocks, but also increase stocks to 40 days as the existing storages have a capacity to increase stock to 40 days.
OMCs can be asked to import the POL products at the maximum. Ogra says that there are enough stocks in the country to cater for 22 days of petrol and 32 days of diesel consumption. Further, the imports are also as per planning and are arriving regularly to cater for the sales. The daily consumption of petrol stands at around 24000 tons and 18000 tons of diesel.
But if the crisis lingers for weeks, then Pakistan will face serious trouble as the fuel shortage is to be evident which will increase inflation because of high fuel prices. The power tariff would also increase manifold because of costly imported fuel, including LNG.
The official said that in this scenario, Pakistan needs to import crude and finished products from Russia, the USA and Algeria but under this scenario, the transportation cost would also increase which will cause a hike in inflation.
However, the chances to close down the Strait of Hormuz are not high as China which is one of the closest friends of Iran. Of its total import, China gets 40-50 percent (4-5 million barrels per day) fuel from the Middle East through Strait of Hormuz. China imports 10 million oil barrels per day out of which 5 million it imports through Strait of Hormuz. China also gets fuel from Iran in abundance. China has invested billions of dollars in Iran also. Iran is currently in consultation with Russia on how to respond after the US attack on Iran’s nuclear sites. China will also give its input to Iran for formulating its response if Iran should attack on the US bases in the Gulf countries, close down the Strait of Hormuz or accelerate the attacks on Israel only and this strategy would also continue to put the USA, G7 countries at pain.
