Rising oil prices

The Arab uprising - especially the Libyan conundrum, has led to substantial changes in oil pricing. Consequently, brent crude has crossed the US $118 mark. This unprecedented price hike is sure to be debilitating for everyone and more so for the developing countries.
The pundits are of the view that the world is once again heading for the peaks seen in 2007-08, when we saw the highest mark of US $147 per barrel. The energy sector circular debt stifling the economy at present is an offshoot of that very peak, we can imagine the ramifications in case oil prices once again reach the same levels and then stay there for a considerable time period.
In other words, in that case there will be no chance at all to mitigate the present problems. On the other hand, because the high oil prices do not just pertain to the Ministry of Petroleum and Natural Resources or the Ministry of Finance - rather, everyone in the country is affected, solutions have to be considered at the national level.
We must understand that it also does not pertain to the present Middle East issues if the head of France's AREVA is to be believed. Anne Lauvergeon says that cheap price for oil and gas is over for future. Thus, there is a requirement to study as to what others are doing on the fast track to offset the negatives of the spiraling oil prices. We may also look into various international practices.
We see that China has formulated an integrated energy plan which seems to have sprung-up from the behemoth's fears about the future. This, in addition to other steps, looks forward to layout an extremely tough five-year conservation plan in the next two weeks. The Chinese government's emphasis on saving energy reflects their national security worries including energy security, pollution problems and mounting concerns about the effects of high energy costs on inflation and export competitiveness.
In pursuit of these goals, China is placing a big bet on renewable energy; having emerged in the past two years as world's biggest but lowest cost manufacturer of wind turbines and solar panels by a wide margin. As this plan basically translates into limiting and rationing energy use, it will be very interesting to see how China's state-owned energy sector will allocate this limited supply by city, province or electricity company. All this, when seen in the Pakistani context where conservation or saving or load cuts are frowned upon, will be a great education.
EU has proposed innovative measures aimed at minimising the effects of sharply rising prices for fuel and at beating its current target for reducing emission, in part by requiring member governments to improve the energy efficiency of public buildings. The plan, which also calls for making transportation and power grids more energy efficient, would require about £ 270 billion, or US $375 billion, in annual investment.
At the same time, the measures could reduce the bloc's annual fuel bill by as much as £ 320 billion. Looking individually at various countries, Spain has announced a series of energy saving measures including a lower speed limit, and cuts to train ticket prices. The goal is to limit the consumption of oil and gas to reduce the energy bill which has risen in recent days and which is not forecast to drop. The Spaniards are going to limit their highway speeds from 120 to 110 Kph so as to save on gasoline. This measure may look perfunctory to some, but is extremely affective and easy to implement.
It would be in order also to discuss the comparative economies, especially India and see as to what they seem to be doing in order to offset the spiraling oil prices. The first step they have taken pertains to heightened spending on the state owned railways by 39% to a record Rs 576.30 billion (US $12.7 billion) for the fiscal year up to March 2012 from Rs 414.26 billion the previous year.
Such rise in the budget for the 155 year old railways, along with the impending 40% increase in defence spending during the coming financial year, is politically significant as it is one of the key ways for the Indian government to win support of the general public. Incidentally, the Indian Railways is the country's biggest employer with 1.4 million people on its payroll, it runs 11000 passenger and freight trains and carries a whopping 19 million people daily. Additionally, they have legislated stringent conservation and energy efficiency laws and seems to the enjoying the ensuing dividends now.
Unfortunately, the Pakistanis are just fighting among themselves and forcing the government not to increase oil prices. The sad part is that all of us are oblivious to the fastly changing prices and may end up in a much bigger crisis than seen in 2007-08.
It was also extremely disconcerting to see the public fighting against the 10-point conservation agenda propagated by PEPCO in 2009 and early 2010. It was not surprising and which speaks of the national psyche, that both the five-day week and the early closure of shops was shunned the very moment power supplies caught up with the demand. That all this was temporary and load shedding started once again after a very short respite of a month or so proves that we only live for today.
As the price hike is debilitating and in all probability will not abate soon and would have a great inflationary effect on the economy, there is an immediate need to follow in the footsteps of China, Europe and India. More so, when unlike us the rich nations could tap their strategic oil reserves, if needed, to ward off the risk that the Middle East political unrest triggers in shape of an unwanted inflationary price spiral. It will be of note that there seems to be great pressure in the USA to tap the oil reserve, which is now at its full capacity of 727 million barrels. The developed world could also further reduce their dependence on oil and convert to renewable or alternate energy, which is not the case with us.
Another issue that merits attention is the fact that reverse flow of investments is evident from the oil dependent developing economies to the developed world. According to statistics, we see that US $5.0 billion has changed borders negatively during the last two months in India, Indonesia, South Korea, Thailand and Philippines alone and the trend would speed-up if oil prices further erode the economies of such countries. According to a news item, the outflows from Pakistan in the current week were US $7.25 million. This fact alone requires the GoP to start acting fast.
As Pakistan relies heavily on oil to meet its energy needs and which quenches a total of 32.1 % (20.2 million TOE) of all the national demand, increase in the oil bill estimated to cross the earlier figure of US $12.0 billion in 2010-11 can be debilitating. Hence, effort needs to be made to reduce the usage to the barest minimum.
Another important thing that forces us to reduce on our present usage is the fact that energy utilisation per unit of GDP in Pakistan is more than double that of the world average and more than five times that of Japan and the UK. According to experts, the present energy crisis in the country should provide the opportunity to correct this wastage through the acceptance of a meaningful and coherent energy conservation and management programme.
In the view of above, Pakistan must immediately reduce the current level of oil consumption. We should thus implement the 10 point power conservation agenda, already propagated by PEPCO, in a very serious and concerted manner.
The agenda consists of restricting shops and plazas to shut business by 8 pm, requirement for agricultural tubewells not to draw water during evening peak hours, lighting-up of only alternate street light points, disconnection of bill boards from the national grid, government offices to reduce their electricity usage by 25% and for not using air conditioning before 11 am, curtailment of marriage and banquet halls to just three hours in the evening; to be garnished by the requirement to shun ornamental and decorative lighting, neon signs and such non-productive usage. Additionally, two other measures were to be adopted viz. daylight saving time and the 5 days week for governmental offices.
Implementation of these 10 measures will lead to reduced demands and then save on fuel oil especially when 45% of the country's generation is powered through oil and usage at the present level would surely beg for increase in power rates. The above steps would additionally result in reduced transportation costs usage. Taking cue from China, Europe and India we need to immediately invest on railways and bring down the speed limits for vehicular traffic to 55 miles per hour or a maximum of 90 Kph viz. the speed which results in the best mileage from automobile engines.
Additionally, gas usage has to be reduced and the gains passed on to the power sector. This can be achieved through use of baffles in the five tubes of existing geysers, replacement and repairs to thermostats, eventual full replacement of burner with standard equipment, implementation of rules baring standby generators to draw on residential gas, captive power to adhere to the requirement of combined cycle or co-generation systems, reduced UFG and improvement in the transmission and distribution systems.
Additionally, no expansion in the pipe lines should be allowed (gas infrastructure development programmes) for the moment. In other words, the public has to be weaned off natural gas to LPG etc and also made to use only standard appliances. This all may be difficult in the current scenario when a shortage of 1.0 bcf is already being faced on the face of a heavily suppressed demand. In case fuel requirement of the power sector is added to the above tally, then the shortage catapults to the 2.0 bcf figure.
So as to buffet the power and gas saving measures, the Ministry of Science and Technology through ENERCON may take-up the National Engine Tuning Programme. Here, the small number of already set-up and now nearly trite tuning centres would have to be buffeted by fast-track incorporation of more such centres along with an intense public awareness campaign.
The Ministry of Industries, the FPCCI and the CCIs, and the Provincial Industries departments will be required to join in the national campaign. Additionally, a separate National Tractors Repairs and Tuning programme would be implemented through the provincial agricultural departments and the manufacturers. As this programme will cater to a whopping number of agricultural equipments, which at present uses up to Rs 85 billion worth of diesel oil, the savings too can be worthwhile. The GOP may pitch in with the part of the cost of this programme.
Calculations show that a serious implementation of the above programmes would result in savings of nearly 7.5 to 10 % of total fuel oil demands for vehicular units. As 47% of the total oil imports (TOE 9.3 million) serve the transport sector, the savings can be 5% of the national energy demands. And in case all of above measures are implemented, then the savings can equal a stupendous US $600 million.
The saving in the oil usage for power generation would be in addition to this figure, which may triple itself to US $1.8 billion over a financial year. In case the speed limits are lowered and the railways somehow gets precedence in budgeting allocation then the magical figure of US $2.0 billion is also achievable. As US $2.0 billion is nearly 15-18% of total oil bill, increase in prices to this level can thus be smothered and in the process pressure to increase consumer end prices will also end.
On the other hand, In case we do not follow the above measures as a national policy, the oil import bill alone will simply shut down the Pakistani economy. There is also a distinct possibility that the present increased remittances of US $6.96 billion for July 2011 to February 2011 would start diminishing. However, as the plan encompasses quite a few of ministries and departments and even some NGOs, the MoF would have to lead the programme from the front with the Planning Commission as the co-ordinator.