One of the key developments during the preceding year was the escalating oil price in international markets that touched a new peak on October, 29, 2004, when WTI touched $56.36/bbl. There were number of unusual factors that brought about this.

Contrary to general market principle where the prices are determined by the market forces of demand and supply, it was the uncertainty that proved to be the main reason behind the hike in the oil prices. The speculators got the chance to drive the margins high.

Uncertainty ranged from exuberant demand for oil from growing China and developing India to issues of disrupted oil supply, continuity of Iraq war and post war unrest, terrorist attacks to oil facilities, geo-political problems in oil producing countries, Yuko's scandal, hurricanes in the American gulf, seasonal factors of colder winter and last but not the least the attitude of OPEC on the developing oil market situations. The oil prices were further pushed up by speculators on the reports of falling inventories in US and OECD.

The bottom line was that the year closed with 33.4 per cent increase in the oil prices in international markets. WTI closed the year at $43.36/bbl, which is still lower by 23 per cent from the October's high.

The oil prices remained subdued during the last two months mainly due to increased supply of oil from OPEC countries that helped OECD countries and US to build inventories.

The plummeted oil prices made many analysts to reckon that the prices are now going back to the normal levels until OPEC asks its members to control their production to the allowed quota and cut the excess supply. The members acted promptly and cut their production that raised the prices again during January 2005.

The question is how oil market has impacted across the world. From the producers' perspective, this was an excellent year and the Gulf countries experienced an oil boom that helped them adjusting their fiscal accounts, in addition to fostering development process to address the long awaited social issues like unemployment.

The key benefit that OPEC realized was that it regained the driving seat to lead the global market course and to acquire a position where its words matter in the market.

From consumer perspective, the impact on the oil prices varies from county to country. This is due to the level of oil dependence of the country, the level of oil efficiency in production process and the extent of currency appreciation against US dollar.

Europe, Japan and other countries that saw their currencies appreciate against dollar were saved from the heat of increasing oil prices to some extent. However, the economies of countries like Pakistan that are not as oil efficient as their western counterparts and supported falling dollar to keep their exports competitive in US markets, were battered by the oil prices.

During preceding year, Pakistan's economy, to some extent, was saved from the heat of oil market, as the country was enjoying the last days of Saudi Oil Facility under which the country was receiving about $800 million worth of free oil.

For some time, the government endured the losses on its exchequer, as it cut the surcharge margin on oil. Although it was often stated that the government will continue to protect the economy from the increasing oil prices, it has started shifting the burden to the consumer and at a time when the oil prices were not increasing in international markets.

The government raised the oil prices by Rs2/liter, the electricity prices were also raised by Rs0.10 to Rs0.15 per unit for small domestic consumers. Gas prices have been increased The increase in energy prices were on the verge of decline following OPEC meeting where no supply cut was announced.

In the backdrop of these developments in national economy, it is desirable to foresee the likely development in the international oil markets and its likely impact on the economy.

OPEC holds that oil price in a range of $40/bbl to $50/bbl for WTI do not hurt the world economy. In addition, OPEC has indicated to the market that they have to live with the pricey oil by asking its members to limit oversupply from allocated quota, as soon as the price for OPEC reference basket falls below $35/bbl, much higher than the price band of $22 - $28/bbl set in March 2000.

OPEC president Sheikh Ahmad Fahad Al-Ahmad Al-Sabah, Minister of Energy, Kuwait said that OPEC would be happy with a price range of $32/bbl to $35/bbl for OPEC basket of crude oil.

Given the market signals by OPEC, the upside potential for the growth in the oil demand and downside risks to the supply of oil, pundits are forecasting another year of pricey oil and the average oil prices are forecasted to remain at higher than the average price of 2004.

If the oil market remains expensive and if the government continues to fill its coffers by collecting an easy tax on oil, what impact would it have on the economy. We are targeting a growth rate of over seven per cent when inflation is moving at the same pace.

We are incorporating this risk into our growth targets, which was not there during past few years owing to Saudi oil facility. As per the input-output models developed by the leading research agencies, oil contributes from five to 35 per cent in the production cost of different goods.

If the producer is able to shift his cost to the domestic consumers through increased prices, then there is a great likelihood that the economy will suffer from the imported inflation, and the central bank has to take measure to curb inflation, which is already slipping out of its hands. The increase in interest rate will adversely affect the growth process.

Our producers are not oil- efficient compared to other international producers and cost shifting through increased prices is not as easy in export markets. Therefore, higher input cost will put pressure on the profit margins of export-oriented producers and they may lose their market on cost-inefficient basis. Lending by the banks to industrial sector would be put at risk.

Common man is always neglected by governments and more so by the present government as indicated by poverty figures. The visiting World Bank President James D. Wolfensohn has said poverty has increased in the last two years.

On external front, the current account, which is already in deficit, will worsen. With these challenges at hand, let us see if the planners have something good to unfold.