final prenstation of economics by dyno

8/14/2019 Final Prenstation of Economics By Dyno

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PRESENTED BY

FATIMA SAEED

UMER TARIQMBA-2

Hitec University Taxila

IMPACT OF OILON PAKISTANS

ECONOMY


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The world today is more dependent on oil as a source ofenergy than it ever was before. This is not the first timeglobal economic leaders are facing the issue of higherenergy prices, and rising rates of inflation, but it is stillcreating a wave of uncertainty, which has negatively

impacted all major financial markets of the world.. Higher energy costs are leading to inflation, as all goodsand services require some measure of energy to product,store, and distribute. Higher energy prices are also lesseningthe discretionary incomes of consumers as they need tospend more on energy leaving less available to spend on

other goods and services, therefore negatively impactingconsumer spending. As consumers spend less onconsumption they decrease the aggregate level ofconsumption in an economy, which impacts total GrossDomestic Product (GDP) negatively.


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The main reason is that a large amount of oilreserves that remain today are located in areaswhere the consumption is low due to lower

populations (the Middle East, and northernEurope). This makes the more populatednations net importers of oil, and increasedprices leads to increased import bills, which

affect a host of other macroeconomicfundamentals of oil-importing nationseconomies.


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The effects of the rising price of oil and its negative externalitiescan most notably be seen in the current severe economicslowdown in some parts of the developing world.

Producer price indexes (PPI), measures the change in prices thatproducers face as a as a result of rising costs, and because of rising

oil prices many nations have steeply increasing PPIs. Producerspass down part of their rising costs to the consumers, whichincrease the shelf price of goods and services driving up the indexof consumer prices (CPI).

The biggest problem with rising prices of imported oil is thatprices are rising at a rate at which none of the central banks acrossthe world expected, and this is adding the huge amounts ofmoney on every nations import bill. Unexpected inflation, due tothe rise in costs of production, and transportation because of therise in energy costs- primarily imported oil- leads to importedinflation in the domestic markets.


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Pakistan is amongst the major developing economies of theworld. With a population of over 150 million, it is also oneof the most populous countries in the world. Pakistan is amajor trading partner to all developed nations of the world,including the U.S., U.K., France, Germany, U.A.E., andSaudi Arabia.The economy of Pakistan has experienced some

unprecedented levels of economic growth in the past 6years. The growth has remained above 6% per annum Yearover Year (YoY) since 2003 to 2007.

The foreign exchange reserves have steadily grown from $2Billion in 2001, to over $14.5 billion in 2007.

Inflation has stood steady at approximately 9% per annumfrom 2000-2007.


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This has led to an increase in the retail prices of petroleumproducts by over 49% since Jan/2008. The increased priceshave translated into higher prices in the broad economy. TheAverage (YoY) CPI has jumped up to 17%. The largest increasewithin the CPI was the increase in prices of food and energy,which have risen by 34.91% and 24.51% respectively. Therupee has depreciated versus the US Dollar by more than 14%since Jan-2008, leading to a capital flight, as more and moreinvestors pull money out of the Pakistani economy, fearingfurther deterioration of the financial stability.this rise in oil prices is leading to huge increase in the PPI, andCPI, leading to higher levels of inflation. Second the risingtrade deficit is growing and adding to an already hefty importbill which is being financed by national exchequer. The currenttrade deficit is greater than 12% of total GDP.


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There is one positive result of the rising price of oil;the rapid development of alternative sources ofenergy.Natural Gas consumption, as the number of CNG

powered vehicles has risen from less than 10,000 in2002, to over 1,500,000 by 2007. The number ofCompressed Natural Gas filling stations has alsoincreased exponentially from less than 20 in 2001,to over 1,500 in 2007. Independent Power

Producers, which provide 35% of total energy to allother sectors of the economy, are swiftly shiftingtheir oil based power generators to natural gasbased generators to ease the burden of rising oilprices on the economy.


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The most simple and obvious argument wouldsuffice for this scenario; natural gas is cheaperthan crude oil in the World markets, there is a

substantial amount of supply available inPakistan eliminating the need for importingenergy raw material, and it is cleaner for theenvironment.


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The following illustration shows the negative impact when themonetary expansion measures had cooled down (2006-present),squeezing the amount of money in circulation; the GDP growthrate slid. Beginning in 2005, the economic growth rate has grownat a decreasing rate, citing the effects of the rise in prices ofimported oil as a primary cause.


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The economy of Pakistan experienced an averageof a 22% increase in broad money and 30%increase in credit growth between 2004 and 2006.Although expansionary monetary policy does aid

inflation, the effects of a growing money supplybetween 2004- 2006 have been minimal in raisinginflationary pressures in Pakistan. As the followingillustration suggests, expansionary monetarypolicy had been implanted as early as 2002, but

CPI did not start rising till as late as early 2008.This picture looks very similar to the illustrationdepicting the rise in the price of oil. Beginning2007, the rise in the price of oil resulted in higherinflation rates in Pakistan


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Examination of the analytical model asmentioned above very similar results as towhat actually happened in Pakistan during the

period when oil prices rose exponentially. Todo this, I am going to use the numbers from thefollowing tables showing the GDP (Y) ofPakistan, the total Consumption Expenditure I,

Investment (I) & Government Spending (G),and the net Exports (x-m).


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GDP at Current Prices (2008)

USD $ (BILLION) 2003 2004 2005 2006 2007 (est.)2008

Consumption( C ) 66.10 78.00 91.85 107.30 120.00 129.78

Investment &

Government

Spending ( I + G ) 13.60 15.58 20.67 27.10 32.35 35.46

Exports ( x ) 10.65 11.25 13.78 15.63 16.05 16.85

Imports ( m ) 11.52 14.29 19.48 27.66 29.50 37.44

Balance of Trade

( x m ) (.87) (3.04) (5.70) (11.97) (13.45) (20.59)

GDP ( Y )

= C+I+G+(x-m) 78.83 90.54 106.82 122.43 138.9 144.65

GDP Percent

Change(YoY)% - +11.71 +17.9 +14.6 +13.5 +4.1%


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Increased imported oil prices cause inflation, asthe costs of production, storage, anddistribution rise (assuming oil is a major source

of energy in the economy). Increased inflationlowers the buying power of consumers inaddition to lowering discretionary income left(after buying more expensive energy) with

households to spend on other goods andservices.


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Consumption(

C )

US$ in Billions Percent

Change

2005 91.85 -

2006 107.30 +16.8%

2007 120.00 +11.8%

2008 125.78 +4.8%

Consumption Spending Growth (2005-2008)

The CPI data which follows shows the rapidincrease in the Consumer Price Index as adirect result of the rising price of oil.


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Consumer Price

Index(YoY)

Percentage Percentage

Change

2004 4.57 -

2005 9.28 +103%

2006 7.92 -14.6%

2007 7.77 -1.8%

2008 18.29 +135%

Consumer Price Index (2004-2008)


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So the rising price of oil has had 2 major affects onthe economy of Pakistan.Effect 1. Increased value of imports (m), have ledto decreased GDP growth rate.

Increased prices of imported oil have also broughtInflation, which has decreased buying power ofmoney, and increased the energy costs ofconsumers and producers resulting in lowerdiscretionary spending.

Effect 2. Lower discretionary spending hascontributed to the declining rate ofconsumption growth ( C ) lowering GDP growthrate further.


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Illustration of Effect 1. & Effect 2.

Effect 1Increased Imports have led to a decreased trade balance or an increased trade deficit as follows


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Effect 2Increased imported energy prices have led to increased prices at homeleading to increased inflation. Increased inflation has decreased thediscretionary income of households, leading to decreased

discretionary spending. Decreased discretionary spending hasresulted in slower consumption growth

Hi h I fl ti L C ti G th f ll


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Higher Inflation = Lower Consumption Growth as follows:

ons mption gro th and higher trade balance res lt


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onsumption growth, and higher trade balance result

decreasing economic growthdepicted as follows


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The advantages of Natural Gas as a substitute forOil are quite apparent in the Pakistani economicframework. The government is offering simpleprice incentives for the use of Natural Gas as

opposed to oil for consumers in the transportindustry; mainly private and commercial vehicles.The other incentive is for Independent powerproducers (IPP) to switch their power production

methods from oil powered pants to gas poweredplants. IPPs contribute to about 35% of thenations total power production, and about 59% oftotal power.

T t l E C ti i P ki t ( 100%)


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Total Energy Consumption in Pakistan (sum = 100%)

Ch i P i f Oil VS Ch i G C ti


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Change in Price of Oil VS. Change in Gas Consumption

Tonnes of

Oil Equiv.(TOE) in

millions

2004 2005 2006 2007 Percent

Change(since

2004 in

2007)Oil

Consumption

11.14 11.71 10.87 10.88 -2.3%

Gas

Consumpti

on

10.01 11.77 13.40 14.90 +48.8%

Price of Oil

($)

$37.66 $50.04 $58.30 $64.20 +70.5%


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From the analysis of the price of oil and itsconsequences for economic growth in Pakistan, and allover the world, I can conclude that the affects areseverely damaging the macroeconomic stability of alleconomies, which are dependent on imported oil.

Pakistan is a good example to show how an increase inthe price of a commodity that has a relatively inelasticdemand can disrupt the macroeconomic fundamentals,such as the level of inflation, the growth inconsumption, and the value of imports, and the trade

deficit. A growing Negative impact of these indicatorshas led to slower economic growth in Pakistan. Themajor consequences on the economy of Pakistan havebeen:


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Increased value of imports (m), have led to an increased trade deficit,which has resulted in a decreased GDP growth rate. Increased prices ofimported oil have also brought Inflation, which has decreased buyingpower of money, and increased the energy costs of consumers andproducers resulting in lower discretionary spending. Lower discretionary

spending has contributed to the declining rate of consumption growth ( C) lowering GDP growth rate further.

The positive outcome in Pakistan has been the rapid development ofNatural Gas, as an alternative to imported oil. Natural Gas is produceddomestically, and this has kept the price of natural gas significantly lowerthan the price of oil in the Pakistans energy markets. NGVs, and gas

powered IPPs can do much more to transform Pakistan into a nation runexclusively on natural Gas. Other alternatives to Fossil Fuels such as Oiland Natural Gas exist in the form of Solar Power, Wind Power, Bio-Dieseland Geo-Thermal Power, but the capital investment required is verylarge, and although current oil prices are shifting attention towards therenewable energy marketplace, there is still some time before solid steps

are taken to take Pakistan towards complete renewable energy.


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ANY QUESTION?

final prenstation of economics by dyno

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