Spike in oil prices
Tuesday, 08 July 2008

By Dr Akhtar Hasan Khan

THE hefty increase in gas prices will lead to serious consequences for the middle class and trade and industry sectors. It will aggravate inflation and depress GDP growth and employment. The universally acclaimed principle of economic policy-making is that changes should be gradual and phased. A shocking jump of 31 per cent in the price of a vital commodity like gas, which supplies 50 per cent of national energy, is bound to make a profound impact

A gradual increase in oil prices would have been justified because the international price of this commodity has surged beyond all expectations. With our domestic production being only 18 per cent of our national requirements, the government cannot subsidise oil beyond a limit. However gas production is cent per cent indigenous. There is no reason why its price should follow the trend in oil prices and not be determined by the cost of production of gas and positive returns for gas producers and distributors.
 
The government has failed to explain this sudden jump in domestically produced gas. If the objective is to encourage foreign firms to increase gas exploration, this objective can be met by assuring that gas from new wells dug in 2008 and beyond will get higher prices. Even today, major gas producers like Oil and Gas Development Company (OGDC), Pak Petroleum and Pak Oilfields are very profitable firms and they do not have to be pushed into greater profitability.
 
The shoddy manner in which the gas price policy was announced is deplorable. The first day saw an increase in CNG prices which was corrected the following day when the error was realised. Trade and industry, which is already suffering on account of acute load shedding, will get another blow from the surge in gas rates. If independent power plants that remit their huge profits abroad and are run by foreigners have been exempted from taxes, all power plants including captive power plants should have been exempted as well.
 
There is no justification or explanation for this ill conceived measure. In all oil producing countries, the commodity's domestic sale is far below the international price. Their governments care for the welfare of their citizens. Unfortunately our economic policy-makers do not realise the repercussions of such a sudden and gigantic hike in oil price on the economy and on the welfare of citizens.

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