Oil prices have dipped by 305% but what does it mean for Pakistan?

Oil prices have turned negative for the first time in history, dipping by 305 per cent as storage space is filling up, discouraging buyers as weak economic data from Germany and Japan cast doubt on when fuel consumption will recover.

The crash in oil prices on Monday was as disrupting as the pandemic, with the United States (US) oil prices plummeting to a range between $1-2 per barrel. The Brent oil prices also hovered around $22-25 per barrel, the lowest in 22 years. The glut created by the price war between Saudi Arabia and Russia was compounded by the extremely low oil demand in most developed economies.

Traders have fled from the expiring contract in a frenzy as barely any buyers are willing to take delivery of oil barrels because there is no place to put the crude, creating a global supply glut as billions of people stay home to slow the spread of COVID-19.

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But what does it mean for countries like Pakistan?

Crash in oil prices is an opportunity for Pakistan because even after passing 50 per cent of the decline on to consumers, the government can make up for revenue fall. Qatari gas will be cheaper than domestic gas.

Pakistan was in the midst of its worst economic crisis before the coronavirus attack and was finding it hard to finance its huge oil bill as the crude oil was hovering in the range of $55-60 per barrel.

After the pandemic, the demand for crude started declining sharply, and it ranged for a long time between $30-40 per barrel in March. Its price started declining sharply in the last 10 days with US oil showing more volatility than Brent Oil that is mainly consumed in Asia. 

With the US oil prices declining to $2, Brent price logically should not be more than $10 which means a price of $12 per barrel. At the moment, Brent Oil is still priced at $22 per barrel but if the buyers started buying from the US this price would not hold.

This low oil price has vindicated former Prime Minister (PM) Shahid Khaqan Abbasi’s inking of an agreement with Qatar for buying Liquefied Natural Gas (LNG) at 13 per cent of the Brent Oil price. At current Brent Oil rates, Pakistan will be buying LNG from Qatar at $2.6-2.8 per mmbt.

At this rate, it would be feasible for the state to procure gas from Qatar at a price even lower than our local gas, reports say.

Qatar is bound under agreement to provide this gas as Pakistan is bound to lift a certain quantity of cargo from Qatar whether we needed it in the domestic market or not.

If the opportunity is made use of, it could lower gas tariff for all industries much below the price that the government is charging from exporting industries after paying huge subsidy and the cost of electricity from gas-run power plants would also decline appreciably.

All this can result in the government making up for massive revenue losses.

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