Rising Oil Prices and Inflation in Pakistan: A Cost-Push Analysis

Pakistan imports over 80% of its crude oil. When global oil prices rise — whether from OPEC production cuts, Middle East conflicts, or demand surges — the impact on Pakistan's economy is immediate, severe, and disproportionate. For economics students, the oil-inflation nexus in Pakistan is one of the most important real-world applications of cost-push inflation theory.

Pakistan's Oil Import Dependence

The numbers tell the story:

• Import bill: Petroleum imports account for approximately 25–30% of Pakistan's total import bill • Volume: Pakistan imports roughly 400,000–500,000 barrels of crude oil per day • Price sensitivity: Every $10/barrel increase in Brent crude adds approximately $1.2–1.5 billion to the annual import bill • Downstream impact: Imported crude is refined into petrol, diesel, kerosene, furnace oil, and jet fuel — affecting transport, electricity generation, industry, and agriculture

Pakistan has virtually no strategic petroleum reserve. Unlike the US (700+ million barrels) or China (200+ million barrels), Pakistan cannot buffer short-term price spikes. Every global oil price movement passes through to domestic prices within weeks.

The Transmission Mechanism: From Global Oil to Pakistani Inflation

Step 1: Global oil price rises

Brent crude increases due to supply disruption (OPEC cut, Middle East conflict) or demand surge (global recovery).

Step 2: Import bill increases

Pakistan pays more dollars for the same volume of oil. The import bill widens, putting pressure on the current account and the rupee.

Step 3: Rupee depreciates

Higher dollar demand for oil imports weakens the PKR. From 2021 to 2023, the rupee fell from PKR 157/$ to PKR 300/$ — roughly doubling the rupee cost of oil even without global price changes.

Step 4: Domestic fuel prices rise

OGRA (Oil and Gas Regulatory Authority) adjusts petrol and diesel prices fortnightly based on international prices and exchange rates. Higher global oil + weaker rupee = sharply higher pump prices.

Step 5: Cost-push inflation spreads

Higher fuel prices increase transport costs → distribution costs for all goods rise → firms raise prices → workers demand higher wages → second-round inflation effects spread through the economy.

Step 6: Electricity costs rise

Furnace oil and imported LNG feed into electricity generation. K-Electric and national grid tariffs increase, raising costs for households and businesses.

This entire chain is a textbook cost-push inflation scenario — SRAS shifting left at every stage.

AD/AS Analysis for Exam Essays

Draw the SRAS shift leftward:

• Initial equilibrium: P1, Y1 • After oil price shock: P2 (higher), Y2 (lower) • Result: stagflation — rising prices AND falling output

Then show the policy dilemma:

• Contractionary monetary policy (raise rates) reduces AD further → lower inflation but even lower output • Expansionary fiscal policy (subsidise fuel) reduces consumer pain but worsens fiscal deficit → potentially more demand-pull inflation • No easy solution — this is why cost-push inflation is harder to manage than demand-pull

Government Policy Options and Evaluation

Option 1: Pass through full oil price increase to consumers

• Pros: Fiscal sustainability, correct price signals, encourages conservation • Cons: Immediate inflation spike, political backlash, hurts low-income households disproportionately • Pakistan's approach under IMF: gradual pass-through with targeted support

Option 2: Maintain fuel subsidies

• Pros: Protects consumers from global volatility, politically popular • Cons: Fiscal cost (subsidies cost hundreds of billions of rupees), benefits wealthy car owners equally, distorts consumption patterns • Pakistan's history: subsidies created fiscal crises requiring IMF bailouts

Option 3: Diversify energy sources

• Pros: Long-term reduction in oil dependence — Thar coal, solar, hydro, nuclear • Cons: Takes years/decades, high upfront investment, environmental trade-offs • Pakistan's progress: CPEC energy projects adding coal and renewable capacity

Option 4: Strategic petroleum reserve

• Pros: Buffers short-term price spikes, allows gradual price adjustment • Cons: Expensive to build and maintain, storage infrastructure needed • Pakistan: Limited progress — vulnerability remains

Comparison with Other Oil-Importing Nations

Why did Pakistan fare worse? Combination of: larger fiscal deficits, sharper rupee depreciation, less diversified energy mix, weaker institutional capacity, and existing structural inflation pressures.

This comparative analysis is excellent A2 Level evaluation material.

Key Statistics for Your Exam Answers

• Pakistan oil import bill (2022): ~$17–19 billion • Petrol price range (2021–2023): PKR 118/litre to PKR 330/litre • Electricity tariff increase (2022–2023): 40–50% cumulative • Transport CPI contribution to overall inflation: ~15–20% • Every 10% rupee depreciation adds ~3–4% to CPI inflation

Use these figures to demonstrate data awareness in your essays.