Petroleum deregulation is not enough for energy security

Refinery upgrades, storage, and diversification are equally critical

KARACHI:

Petroleum prices in Pakistan have always been more than an economic indicator; they influence inflation, industrial competitiveness, government revenues, and the cost of living. In recent years, Pakistan has accelerated reforms by moving towards greater deregulation of the petroleum sector while simultaneously facing unprecedented volatility in global oil markets caused by geopolitical conflicts, supply disruptions, and changing energy policies.

This convergence has created both opportunities and risks. While deregulation can improve market efficiency and attract investment, it also exposes consumers and businesses to fluctuations in international crude oil prices. The challenge for Pakistan is to balance market liberalisation with long-term energy security. Pakistan remains heavily dependent on imported petroleum to meet its energy needs. According to the Pakistan Economic Survey 2024-25, petroleum products constitute one of the country's largest import categories, making the economy highly vulnerable to changes in global crude oil prices. Domestic refineries satisfy only part of national demand, while the remainder is met through imports of crude oil and refined petroleum products. Consequently, every increase in international oil prices raises Pakistan's import bill, exerts pressure on foreign exchange reserves, and contributes to inflation.

The country's vulnerability became particularly evident during the global oil market turbulence between 2020 and 2022. During the Covid-19 pandemic, Brent crude prices briefly fell below $20 per barrel as worldwide demand collapsed. However, the global economic recovery and the Russia-Ukraine conflict pushed Brent crude above $120 per barrel in 2022. These dramatic price swings translated directly into higher domestic fuel prices, demonstrating Pakistan's limited ability to shield its economy from external shocks.

Pakistan previously exercised significant government control over petroleum pricing through subsidies and administrative interventions. While these measures temporarily protected consumers, they imposed substantial fiscal costs. During periods of elevated global oil prices, successive governments delayed passing price increases to consumers, creating financial pressures for oil marketing companies, refineries, and the national budget. Large fuel subsidies widened fiscal deficits, increased public borrowing, and weakened macroeconomic stability.

A major shift occurred under reforms supported by the International Monetary Fund (IMF). The government gradually adopted market-based pricing mechanisms, reduced untargeted fuel subsidies, and strengthened petroleum taxation. These reforms sought to improve fiscal discipline, reduce distortions, and ensure that domestic fuel prices reflected international market conditions. They also aimed to encourage private investment by providing greater pricing transparency and reducing political intervention in fuel pricing decisions.

Today, the Oil and Gas Regulatory Authority (OGRA) calculates ex-refinery prices and recommends adjustments based on international oil prices, exchange rate movements, freight costs, and taxes. The federal government then announces revised retail prices after incorporating the petroleum levy and other applicable charges. Although this system is more transparent than previous discretionary approaches, it also means that Pakistani consumers are directly exposed to fluctuations in global oil markets.

An increasingly important component of fuel pricing is the Petroleum Levy (PL), which has become a major source of government revenue. Unlike the general sales tax, petroleum levy proceeds are retained entirely by the federal government. Recent federal budgets have steadily increased levy collections to strengthen fiscal consolidation and meet IMF programme commitments. While higher levy collections support public finances, they also increase retail fuel prices, creating concerns about affordability for households and industries.

Global geopolitical developments continue to pose significant risks. International oil prices are influenced by decisions taken by OPEC+, conflicts in the Middle East, sanctions on oil-producing nations, and disruptions in critical shipping routes such as the Strait of Hormuz and the Red Sea. Any interruption in these supply chains can immediately increase crude oil prices and freight costs. Since Pakistan imports the majority of its petroleum requirements, these developments quickly translate into higher domestic fuel prices.

Exchange rate volatility further compounds the challenge. Because petroleum imports are paid for in US dollars, depreciation of the Pakistani rupee increases domestic fuel prices even if international crude prices remain stable. During the balance-of-payments crisis of 2022 and 2023, the rupee's depreciation significantly raised petroleum import costs, contributing to inflation across transport, manufacturing, agriculture, and electricity generation. This illustrates that fuel prices in Pakistan depend not only on international oil markets but also on broader macroeconomic stability. Higher petroleum prices have widespread economic consequences. Diesel is the backbone of Pakistan's transportation network and agricultural sector. Rising diesel prices increase freight charges, raising the cost of food, construction materials, and manufactured goods. Farmers also face higher operating expenses for tractors, tube wells, and harvesting equipment, increasing agricultural production costs and contributing to food inflation. Consequently, petroleum price movements affect nearly every sector of the economy.

Deregulation offers important long-term benefits. Market-based pricing creates greater confidence for investors by providing transparent and commercially sustainable pricing mechanisms. This encourages investment in refineries, storage facilities, and fuel distribution networks. Pakistan's refining industry requires significant modernisation to produce cleaner fuels and reduce dependence on imported petroleum products. Industry estimates indicate that planned refinery upgrade projects could attract investments exceeding $6 billion, improving domestic refining capacity and enhancing energy security.

Modernising refineries would also reduce Pakistan's dependence on imported refined fuels while enabling compliance with international environmental standards such as Euro-V fuel specifications. Greater domestic refining capacity would improve resilience during periods of international supply disruption and strengthen the country's energy infrastructure.

Another important priority is the development of strategic petroleum reserves. Many energy-importing countries maintain emergency oil stocks sufficient to cover several weeks or months of consumption during supply disruptions. Pakistan currently relies primarily on commercial inventories maintained by oil marketing companies, limiting its ability to respond effectively to geopolitical crises. Expanding strategic petroleum reserves would strengthen national energy security and reduce vulnerability to temporary supply interruptions.

Reducing long-term dependence on imported petroleum also requires accelerating energy diversification. Pakistan possesses considerable potential in hydropower, solar, wind, and indigenous natural gas resources.

THE WRITER IS A MEMBER OF PEC AND HOLDS A MASTER'S DEGREE IN ENGINEERING