Oil, power and policy

Construction site of a clean coal power plant in southern Malaysia

Oil, power and policy
The world economy is going through a major structural transformation. These are interesting times for the oil markets. International oil prices have more than just halved since last summer’s peak – a rapid plunge and a bane for any oil exporting country. This presents significant challenges for the oil exporters in the Middle East and Russia. The gulf countries will have their export earnings squandered by roughly $300 billion. This means that they will have to utilize their buffer in petro dollars in order to prevent a potential wobbling of the balance of payments. Their budgets will have to be revisited and projections for growth revised. The story for the Russians is not very different. They are among the top oil exporters of the world and are expected to see their economy shrink this year. Meanwhile, other oil players including Central Asia, some African states and Latin America, are all likely to witness stagnation in their growth profiles. In the midst of these global developments, Pakistan must stand to benefit through lower oil prices, as IMF’s Director of Research Oliver Blanchard strongly believes that the present situation is good news for oil importers and bad news for oil exporters.

Considering a drastically changing global economy, Pakistan’s current fuel crisis is completely unmerited. The dynamics of this are perhaps domestic. Last week we blamed the incompetence of the current and the preceding administration to deal with the power crisis which in turn is causing disturbances in the petroleum markets. This is true as the power sector today is heavily dependent on the petroleum sector. Perhaps more now than ever before.
The fact that the Ministry of Finance has a role to play in energy is a case for amusement

Pakistan’s net consumption of oil in tons of oil equivalent (TOE) in the fiscal year 2014 was 18.7 million, which translates into 437.06 thousand barrels per day. The production of oil for the same period amounts to a total of 80.80 thousand barrels per day. This massive difference between consumption and production is met through petroleum imports. These imports have continued to escalate just as the difference between oil production and consumption continued to widen. Our policy makers have lacked the vision to diversify out of oil into other more economical alternatives. Oil has become the life blood of the economy, without Pakistan being an oil exporting country. Oil mafias have emerged as a result, and public policy as usual is tainted with corruption.

A diversification strategy is therefore very useful. Malaysia is a good case in point. It started off with a four-fuel diversification strategy in 1980. The country learned from the oil price shocks of the 1970s, the 1972-73 Yom Kippur war, and the 1979 Iranian Revolution. Fossil fuel dominated the fuel mix of Malaysia. The use of affordable resources like coal and hydel were almost nonexistent. However, through political will and a well-coordinated policy, oil is now used to generate only 2 percent of Malaysia’s power, with coal and hydel accounting for around 35 percent and 13 percent respectively. Malaysia’s coal reserves are 1.72 billion tons, in comparison to Pakistan’s mammoth reserves of 185 billion tons.

The failure of successive political administrations to resolve Pakistan’s circular debt issue has significantly stymied domestic growth. The recent fuel supply crisis is also inevitably tied to circular debt, for if the power sector will be deprived of adequate cash flows to replenish its balance sheet, the same will be true for the petroleum markets ability to supply oil to the economy. Power tariffs in Pakistan are irrational as the country’s regulator (NEPRA) is practically not spared of a bureaucratic and a ministerial intervention. The Ministry of Finance also plays a role in keeping the broader energy sector afloat through timely payments of tariff differential subsidies. In case the ministry fails to subsidize the energy sector, the entire supply chain from the power distributors’ right up to the oil refineries will get choked. Therefore one can safely say that there is enough intellectual weight around for the political administration to discover the root causes of the energy crisis. Given the current structure of the energy sector in Pakistan, this crisis will continue to recur after every six months or less. Given this situation, it is by no means surprising to see Pakistan in the grip of widespread load shedding once again. The government must chart out a vision for the sector and a comprehensive policy plan which is tuned to service delivery.

The following five overarching policy actions must immediately be taken.

l Pakistan’s energy sector struggles from a lack of direction. The sector has too many stakeholders at the policy level. The fact that the Ministry of Finance has a role to play in energy is a case for amusement. Having three regulators and three ministries in the energy sector is resulting in a lack of coordination within the government itself. The Ministry of Water and Power and the Ministry of Petroleum must be consolidated into a single ministry. Such ministries operate successfully in the US, Canada, Israel, Nepal, Philippines and South Africa.

l Regulators both in the power sector and the petroleum sector must also be consolidated with minimal political intervention. Technocrats should be inducted in these regulators and ministries, who would have the knowledge base to make projections about Pakistan’s oil consumption and production. This will in turn facilitate the government to take the right decisions.

l The government must invest heavily in improving the quality of the public transport, which would prove a critical demand side measure. Another demand side measure would be to promote the import of hybrid cars into the country with tax reliefs provided to the middle classes.

Men wait in line to get fuel for their motorbikes at a fuel station in Rawalpindi
Men wait in line to get fuel for their motorbikes at a fuel station in Rawalpindi

l The government must promote off grid power solutions through solar and wind power projects and try to weaken the interdependence between the power sector and the oil markets.

l State level oil supply companies must immediately be audited for potential organizational improvements. Tax incentives to foreign oil exploration companies must be fast tracked. The Pakistan State Oil Company could possibly be fully privatized as the government has clearly failed to corporatize the entity.

The writer is a development economist