Prime Minister of Rich and Geo-Economics of Oil

A STRATPAK Analysis of the Geo-Economics of Oil and its Impact on South Asia

Months after swearing in as the President of the United States, Donald Trump authorized the dropping of a ‘mother of all bombs’ on ISIS caves in the Nangarhar Province in Afghanistan. Last month, as part of his usual anti-Pakistan campaign rhetoric, the Indian PM Narendra Modi also warned Pakistan of an Indian nuclear ‘moab.’

The common in Pakistan were destroyed; distraught at the decision of their own government to hike the energy prices on May 5. It came after the government had halted the price hike at the start of the month. The prices of petroleum products went up by more than nine percent. Such a massive increase has little chance of going unnoticed as the country faces a macro-economic crisis. The government has thus far failed to remedy the situation. The Finance Minister, also known as, the ‘Minister Deficit’ stepped down last month, and another Finance Secretary left for abroad on a three-year vacation.

A day after the government’s decision to increase the prices of energy products, the global oil prices sank by more than two percent. The government justifies the price hike by pointing toward strengthening dollar and shrinking foreign reserves. It is an attempt by the government to balance the unhinged budget books at the close of the fiscal year. Economists appraise that the conditions from the IMF and ADB may have forced the government to raise consumer spending in the energy sector.

Primarily, the GDP depends on consumer spending, business investment and government spending. The energy sector has attracted hundreds of millions of dollars as business investments in the current year, with the promise of more investments in the years to come. That the government has tried to artificially increase consumer spending in the sector suggests that government spending in the energy sector has decreased. This despite the fact that the government spends more than two percent of the GDP in the energy sector subsidies.

“There is no letup in hostility toward the poor masses … the people wonder whether Imran Khan is just a Prime Minister of the Rich?”

There is no letup in hostility toward the poor masses under the PTI-led government. The price hike in the energy sector has become a double whammy for consumers. Not only, they will have to buy overpriced gasoline and electricity, but also they will have to buy expensive agricultural and industrial products. Whenever, the energy prices go up, the prices of 62 basic commodities also rise. If the price hikes are sustained, as the trends indicate, it will only mean that the backbone of the economy of Pakistan, the agriculture and domestic industry, will lose revenue. They may offload some of the labour as well. It will tax the economy with higher unemployment and lower revenues. The government’s efforts to avoid the budget deficit puts the consumers’ budgets in deficit. The people wonder whether Imran Khan is just a ‘Prime Minister of the Rich?’

In the region, Pakistan boasts abysmal numbers. Its tax-to-GDP ratio is under two-figures if a hundred-and-fifty billion dollars of the informal untaxed economy are also taken into account. Secondly, the GDP growth rate is among the lowest in the region. The IMF and World Bank reports indicate slower years ahead.

Meanwhile, India boasts more than seven percent GDP growth a year compared to Pakistan’s three percent. At its current rate, India will surpass Germany in eight years. It will also leave Japan behind to become the third largest economy in the world by the year 2030. Whereas, Pakistan will only be able to join the future 25 trillion dollar economies in twice that time period. The policymakers and the economists remain concerned about Pakistan’s pace.

“Pakistan consumes around a hundred billion kWh of energy per year as compared to India’s 1,100 billion kWh of energy. The numbers reflect the difference in the respective economies.”

India cannot put international economic sanctions on Pakistan. It wants to but it does not have the power and the authority to do so. However, it is trying to put the Pakistani economy under strain and buying-out oil to the levels that Pakistan’s demand is hurt. In an age when the economy is structured around energy, India is taking the lead at the expense of its competitors in the region, the chief being Pakistan. Pakistan consumes around a hundred billion kWh of energy per year as compared to India’s 1,100 billion kWh of energy. The numbers reflect the difference in the respective economies. On a yearly basis, average Pakistanis consume 469 kWh of energy which is half as good as their Indian counterparts.

Pakistan and India are energy importing nations. They rely heavily on international trade laws and conditions to sustain energy imports and thereby, economic development. High energy consumption with little domestic production can be a double-edged sword. If the international trade environment were going to change, it will cast doubt on the sustainability of economic development. Therefore, both countries need low-cost imports to seek out a balance of trade. India loses six percent of its GDP in trade-balance. Like Pakistan, it also relies on Foreign Direct Investment. It exports over eleven percent of its GDP while Pakistan exports under nine percent of its GDP. In that, India economy depends heavily on the world economy while Pakistan has a more self-sustainable economy.

The global oil producers are wailing over the low profits. In an event of a conflict in the Persian Gulf, or a supply disruption therefrom, mega-energy importers are bound to take the hit. Therefore, the energy importers like Pakistan and India seek newer and favourable trade partners. Already, gasoline prices in India are fifty percent more than Pakistan. The consumers in India face the same problem of price hikes month in, month out. As it stands, both countries are hurting the optimum growth potentials of each other. From the perspective of geo-economics, cooperation between Pakistan and India will bend the producers to their knees. 

The generals on both sides are very wary of sacrificing their troops in a war without fruition. If war is down on the priorities’ list, cooperation should be in vogue. America has already undermined Indian sovereignty. Trump has forbidden India from purchasing Iranian oil. Common wisdom dictates that Pakistan and India must seek alternates to their current energy suppliers. Cooperation in this regard will benefit both nations.