Apr 282008

THE 1973 oil price increase altered the relative price structure for almost every commodity globally and within each country. Three and a half decades later, the current dramatic rise in international oil prices has delivered another shock to the world economy as a whole and to the individual national economies.
Among the multiple consequences, two impacts are critical, particularly for developing countries. One, it has intensified the balance of payments burden of non-oil producing countries. And two, it has fundamentally altered the fuel-food price equation. Urgent responses are in order and at least three strategic structural shifts are called for.

The first impact – foreign exchange burden of the oil price escalation – can be seen from the fact that import of petroleum and petroleum products constituted less than one-sixth of the import bill in fiscal year 1999, rose to almost one-quarter in fiscal year 2007 and is expected to be even higher currently.

The challenge has to be met either by raising foreign exchange receipts or by curtailing oil imports. There are no sustainable sources of foreign exchange receipts that can enable the treasury to meet the substantially enhanced – and rising – foreign exchange payments on the oil account. Effort, therefore, needs to be focused on oil consumption and imports.

Pakistan’s oil consumption basket constitutes a number of products: high speed diesel, light diesel oil, motor spirits, furnace oil, aviation fuels, kerosene, etc. The transport sector is the largest consumer of petroleum products, accounting for over 55 per cent of total petroleum products consumption. The major product used in transport is high speed diesel, which accounts for over 50 per cent of all petroleum products used in the country. Clearly, attempts to contain petroleum consumption needs to be concentrated on the transport sector.

Currently, Pakistan’s goods transport is largely road-based. Over 95 per cent of freight transport in the country is carried by road and the rest by rail. There is considerable empirical research the world over, showing long-distance freight unit cost to be significantly lower for rail transport than for road transport. There is, as such, sufficient cause for exploring the feasibility of a modal shift from road to rail.

Consideration needs to be given to introducing modern high speed container trains travelling at 150-200 kilometres an hour to carry goods long distance to designated stations, from where the containers could be transferred onto trucks for onward short distance haulage to nearby destinations. Even at 100 kilometres an hour, a train can make the journey from Karachi to Lahore in less than 10 hours and to Peshawar in about 15 hours.

Road transport cannot match either the fuel efficiency or the saving in transportation time that rail transport would offer. Consumption of high speed diesel can be expected to fall, effecting savings in foreign exchange payouts. Further, if passenger carriages are added to the trains, shifts in passenger travel from increasingly expensive air travel to relatively less expensive train journeys can also occur; thereby, effecting savings on the aviation fuels front as well. Carriages that offer comfortable sleeping facility and carry passengers overnight from, say, Karachi to Islamabad is likely to emerge as an attractive alternative.

As such, even if absolute declines in oil imports do not transpire, a decline in the rate of growth would itself offer a major boon in terms of pressure on foreign exchange availability in future years. The containment of the freight cost of transporting goods can also offer a salutary effect on cost-push inflationary pressures.

The second impact relates to the fuel-food equation and will have structural impacts on the very composition of agriculture. Producing fuel from agricultural commodities has been a technical possibility for quite some time now. However, it has been economically unfeasible. The sharp rise in oil prices has extended the technical feasibility to the range of economic feasibility. Brazil, for example, has shifted a part of its sugarcane output to producing ethanol for use as motor fuel.

The choices that Pakistan will face will be manifold. If sugarcane is used to produce fuel instead of sugar, Pakistan will have to meet part or all of its domestic sugar requirements by importing sugar; ostensibly at higher world prices. If relative profitability from sugarcane rises, more acreage is likely to be brought under the crop, leading to less acreage for competing crops like wheat and cotton. The research questions that would arise would be as follows: if ethanol is produced, would the savings from lower fuel imports be greater than the additional cost of importing sugar; if more acreage is devoted to sugarcane, would the savings from lower fuel imports be greater than the cost of imports of wheat and raw cotton; and so on.

The fuel-food equation shift also carries important equity implications. The greater demand for agricultural products for producing fuel will accrue higher prices to producers. At the same time, consumers will have to pay higher prices for food and fibre products. There are loud calls already, including from the World Bank, for attention to the unfolding crisis that could lead to mass hunger arising from the inability of the poor to afford the cost of food.

The challenge is enormous and requires that the neo-liberal fiscal management paradigm be abandoned. Consumers, particularly the poor, can only be protected through targeted provision of subsidised basic food items or direct cash grants or both. Accordingly, two axioms will have to be incorporated into the policy framework: direct support to the vulnerable population and, resultantly, the presence of an accepted subsidy element in annual budgets. According to current population, income, poverty level and price data configurations, at least one third of the population will need some degree of support; requiring a reserved budgetary allocation of one percent of GDP for support to the vulnerable households.

The crisis emanating from the escalation of world oil prices needs careful attention. Left to the market, with its inherent inefficiencies and insensitivities to equity considerations, or to politically motivated government decisions determined by the strength of particular lobbies, the results for the economy can be disastrous. The challenges are structural and require detailed and comprehensive analyses; which in itself demands a greater element of analytical and planning capacity in the government. Above all, the call in this hour of crisis is for a strategic vision.

Source: Daily Dawn, 28/4/2008

 Posted by at 4:50 pm

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