Oil worries

Officials and experts attending the recent IMF and World Bank spring meetings in Washington DC were upbeat about the current health of the world economy but showed a great deal of concern about the rising oil prices.
The communiqué, read out at a joint press briefing at the IMF headquarters by Chairman Gordon Brown and Managing Director Rodrigo de Rato, welcomed the "continued strong expansion of the global economy despite higher oil prices".
More impressive was the fact that the expansion of the world economy was becoming more broad-based and the global growth was expected to remain strong in the next couple of years. Also, "inflation and inflationary expectations remain well contained - although with excess capacity diminishing - continued vigilance will be required".
However, continued high and volatile oil prices posed a major downward risk to the world economy. Other risks included the potential for an abrupt shift in global financial market conditions and a rise in protectionism.
Crude oil prices touched an unprecedented level of 75 dollars a barrel and experts attending the IMF and World Bank meetings feared that a US military strike on Iran may cause it to go beyond 100 dollars, a price which will be simply unaffordable for most nations.
According to an IMF official, given the current supply-demand ratio, the world oil price would stabilise at 30 dollars, with 20 dollars per barrel added as refining cost and another 25 dollars due to regional risks such as wars and conflicts in the Middle East. The risk factor could add another 25-30 dollars per barrel to the cost if Iran is attacked.
Pakistan's stakes are quite high in this kind of scenario due to its extraordinary dependence on oil imports. According to Salman Shah, Advisor to the Prime Minister on Finance, who led the Pakistani delegation at IMF-WB meetings, the country would have to take extraordinary measures to deal with such a situation (if Iran is attacked and as a consequence oil prices jumped to around/over 100 dollars a barrel).
These measures include diversifying sources of energy like building of pipelines to gas fields in Iran and Central Asia, which would bring the much-needed energy security for the country "without which everything can be destabilised".
The reliance on oil also needs to be reduced by developing alternative sources such as using our rivers to produce more energy. However, such an alternative would take a longer time and that is why gas pipelines are so important.
The concerns expressed at the IMF-WB meetings are undoubtedly genuine. In our view prospects of the world economy would be even dimmer and the global growth may not remain strong in the next couple of years as projected by the experts. Both the developed and developing countries would be hit hard by a sudden rise in oil prices but the impact on developing countries would particularly be severe and devastating.
Therefore, the world community needs to join hands to persuade the United States to take a more rational view and desist from exercising the military option so far as Iran was concerned. Fortunately, most of the major powers are advising restraint and impressing upon the parties to give diplomacy a chance. While such efforts need to be encouraged and commended, a country like Pakistan cannot afford to remain unprepared.
Salman Shah is right about the need of diversifying supply sources and developing alternative sources of energy but the real question is how much progress we have made towards this end in the past and what can be expected in future. In fact, the country has largely failed to utilise its rivers for producing more energy and lower its dependence on oil.
For instance, the percentage share of hydel power in electricity generation by Wapda dropped by about 15 percent in the last ten years while that of thermal increased by the same percentage, necessitating a much higher level of consumption of oil for energy supplies in the country.
The moment the government talks about building a big dam, the opposition to the project becomes so charged and difficult to endure that it has to be shelved. Building of a gas pipeline has been discussed and debated for more than a decade but it was only in the recent past that it seems to have been taken up seriously.
It needs hardly any emphasis that the country must redouble its efforts for securing energy at affordable prices and without interruption otherwise the country could face bleak prospects. Countries as powerful and resourceful as China cannot ignore the hazards of skyrocketing oil prices or disruption in supplies.
For instance, its President Hu Jintao made it a point to visit Saudi Arabia to discuss a proposal to set up a Saudi-fed strategic oil reserve in China to safeguard its long-term interests. Another problem for Pakistan is that the demand for oil is relatively inelastic.
Imports of crude and petroleum products during July-February 2006, for instance, rose by over 66 percent to 4.01 billion dollars over the same period a year ago. Although a major part of increase in value was attributable to change in unit value, quantity imported also went up by 1.2 percent during this period.
In this kind of situation, it usually becomes more difficult to manage the external sector balance of the country if prices continue to rise.