Oil price bonanza
ALTHOUGH economic growth is the government’s mantra, whether it will utilise the recent freefall in crude oil prices to turn the economy around is a moot point. The battle of the sheikhs vs shale gas has not only impacted geopolitics, it has also brought the oil price at Brent crude (the global oil price benchmark) to $59 a barrel. Meanwhile WTI, the US benchmark, has dropped to $55 from well over $110 in June 2014.
Pakistan’s economy is in shambles, a situation exacerbated by poor leadership and bad governance. One result is that a 45pc reduction in petrol prices has translated into only 15pc reduction for motorists.
The recent drop in oil prices can improve two crucial data points: the energy crisis and external balance of payments. The deepening power shortage has sparked violent protests and cost thousands of jobs in a country already beset with high unemployment.
The government has failed to take full advantage of falling oil prices.
OPEC’s more powerful members are willing to bear the crunch of oil prices as low as $50 a barrel to take on Russia, Iran (even though it is a member of OPEC) and US shale revolution. This opportunity must be used by the government to end the energy crisis. A quick look at Pakistan’s energy crisis shows the gap between supply and demand exceeded 6,000 megawatts in summer, and remained around 4,000 to 5,000 MW for most of the year. This shortfall, representing about one-third of the total demand, saw one-third of the consumers remain without power for over 20 hours at a time.
It is important to emphasise that Pakistan’s energy crisis is not due to insufficient installed capacity, which is 24000MW, but because of an inefficient energy mix, as a result of which it failed to meet the peak demand of 19,000MW last summer.
In the energy mix, the share of thermal generation is 68pc but this touches 80pc in winter when the hydroelectricity share is reduced to 14pc. In the thermal power generation pie, the major share is of oil-based generation. The share of gas-based generation was almost 45pc in 2005, but is down to 19pc now due to rapid depletion of gas reserves.
Dependence on imported oil means the government has paid huge subsidies totalling Rs1,900 billion over the last eight years, mainly because of a significant difference — caused by a persistent rise in international oil prices — between generation cost and notified tariff.
Using oil for electricity generation also spawned the monster of circular debt. Despite the payment of Rs500bn to settle it in July 2013, the net circular debt again reached Rs300bn in September 2014. Moreover, high cost of generation has forced power plants to remain idle, which is the primary reason for the power cuts, aside from inefficiencies caused by bad governance, losses and low recoveries.
The coal projects initiative is intended to add 6,600MW to the grid, but given its high tariffs, it remains unviable in comparison to oil at $60 per barrel.
Furnace oil prices have also tumbled to $360 per ton as of December 2014, from $630 in June 2014. Simple mathematical calculations show that electricity generation using furnace oil should now come to around Rs10.50 per unit, as 60-80pc of the cost depends on the fuel cost component (along with the operations and maintenance cost).
Therefore, the fall in oil prices must be reflected in the tariffs, and should intuitively lead to a reduction in subsidies, essentially a lucky fix for the energy crisis. This would bring down the basket price of electricity, making it more affordable, eliminating the need for a subsidy, and giving relief to 23 million consumers.
However, the government has failed to take full advantage of the falling oil prices, a godsend for oil-importing economies. Until and unless it does so, the energy crisis of more than seven years will persist.
For a start, the government must increase the efficiency of the existing fleet of thermal power plants through retrofitting and rehabilitation. In layman’s terms, increasing efficiency means using the minimum quantity of oil and gas for maximum generation.
The question is, will the government adopt the simple strategy of increasing efficiency, and then running power plants at full capacity by utilising the low oil prices until viable? In the current situation, this is an excellent short-term solution and an easily executable strategy. For any policymaker in the energy sector in oil-importing Pakistan, this is no less than a heaven-sent opportunity.
Keeping the volatility of global oil prices in mind, it would be wise for the government to execute a new, rational and robust national power policy based on the Energy Vision 2035 document. Meanwhile, it will not take rocket science, but simple mathematics and a sense of purpose, to turn around the energy crisis.
The writer is adviser on water and energy at the Sustainable Development Policy Institute, Islamabad.
Published in Dawn, December 28th, 2014