Fuel prices poised to squeeze Pakistan’s businesses again

Owing to frequent fuel price hikes, business owners and citizens alike might not be surprised to know that the price of diesel and petrol might rise once the Oil and Gas Regulatory Authority (OGRA) submits its calculations to Islamabad. According to Dawn, the price of diesel is expected to rise by 3.62 rupees while petrol will increase by just 11 paisa from January 1, 2025.

It is quite obvious that this will spell bad news for transport company owners. The cost of daily operations will increase sharply, as fuel is the largest material input in transportation companies.

Transport companies could now see lower profit margins with rising operational costs. The only way these companies can avoid shrinking profit levels is to pass on these costs to their consumers in the form of higher fares. That could, however, cause a fall in the number of customers willing to travel with companies that raise their fares.

Another sector that will be hit hard, and is often overlooked when considering the effects of higher fuel prices, is agriculture, where a significant number of farms rely on water pumps for irrigation.

A report from the University of Veterinary and Animal Sciences in Lahore reveals an overwhelming majority of farm owners possess a water pump, with 73.3 per cent of farmers leaning towards using groundwater over surface water. However, with diesel prices rising, farmers are to bear the burden of extracting groundwater using pumps as it will be more expensive now.

The plight of farmers does not end here, as tractors also require diesel to operate, causing a sharp rise in the costs that farmers will have to pay now. The agricultural sector is responsible for 36.43 per cent of employment in Pakistan, and falling profit margins due to diesel price hikes may result in landlords considering layoffs to maintain a healthy stream of profits.

This might cause food prices to increase further if farmers pass on the additional costs they incur, or they will have to absorb these costs to satisfy customers while their profit margins fall. The impact of rising diesel prices will be most pronounced on sugarcane producers as sugarcane production alone consumes approximately 42 per cent of the total annual household water demand of Pakistan, according to the Pakistan Institute of Development Economics.

Export-oriented sectors that are located further inland will suffer too. This is because the cost of transporting goods from factories to Karachi port will rise if fuel prices rise. Export competitiveness for sectors such as surgical instruments and textiles will drop. This is because Sialkot and Faisalabad are over 1300 kilometres and over 1100 kilometres from Karachi, respectively.

If the expected price hike is realised, the price of diesel will come back to exactly what it was at the start of the year. While some claim this is the result of dropping inflation rates from 38 per cent in May 2023 to just 4.9 per cent, it is not the entire truth.

The average price of crude oil per barrel was $77.64 in 2023, while it was just $73.23 in 2024. Diesel prices in Pakistan, therefore, have risen over the past year in real terms, even if they appear to be stable in nominal terms.