A smart response to oil shocks

2026-03-16 - 05:04

Pakistanis are once again confronting a familiar shock: a sharp, drastic rise in fuel prices. At the pump, it feels immediate and personal, but the real story of petrol prices runs much deeper. Energy prices are not just a cost for motorists; they are a central artery of the economy. Energy prices function much like blood pressure in the human body. If they rise too high, economic growth slows. If they are artificially suppressed for too long, fiscal deficits and debt begin to rise. The challenge for policymakers is to keep that pressure balanced so the economy can function smoothly. When fuel prices rise sharply, the effect spreads quickly. Transport becomes more expensive. Food logistics costs increase. Electricity generation becomes costlier in parts of the system that still rely on imported fuels. Manufacturers face higher input costs and businesses pass those costs on, ultimately burdening households. The result is a powerful squeeze on disposable income. For low and middle-income households, already dealing with high inflation, this squeeze is particularly painful. When families spend more on transport, food, and utilities, they cut back elsewhere. Consumption slows, businesses sell less, and economic activity weakens. Communication at a time like this is critical; citizens should hear a message that the government is working with international partners to ensure continuity of crude supplies Pakistan’s economy is especially sensitive to this dynamic because it is still largely consumption driven. When disposable income falls, money circulation across the economy slows. That slowdown eventually translates into lower GDP growth and higher unemployment. This is why energy price shocks must be handled carefully. The simplest policy response is often to increase retail fuel prices immediately and pass the full burden to consumers. However, while that approach may appear fiscally responsible, it can also be economically dangerous if done without complementary measures. Pakistan already imports roughly $17–18 billion worth of petroleum products each year. When global oil prices jump from around $75 per barrel to $95 or higher, the country’s import bill rises significantly. This creates pressure on the current account, weakens the rupee, and fuels inflation. In such circumstances, while simply raising prices is the most straightforward policy choice, it is also the least imaginative one. Periods of geopolitical disruption require strategic thinking and temporary tactical adjustments. The current volatility in global energy markets is linked to tensions in the Middle East. These disruptions may last weeks or months, but they are unlikely to last forever. The task for policymakers is to navigate this period without inflicting unnecessary damage on the domestic economy. Communication at a time like this is critical. Citizens should hear a message that the government understands the risks, has contingency plans in place, and is working with international partners to ensure continuity of supply. One of the lessons from prior global energy crises is that markets react as much to expectations as to actual shortages. When governments communicate clearly and act decisively, panic subsides. When information is scarce, rumours fill the vacuum. Ultimately, the goal is simple: prevent fear from becoming the crisis itself. Geopolitical shocks are fundamentally different from routine market fluctuations, and they should be treated as exceptional circumstances rather than business as usual. International financial partners and multilateral institutions understand this distinction in many economies around the world. Even major global powers have adopted pragmatic approaches during extraordinary situations, for example, the flexibility that allowed India to continue purchasing Russian oil during periods of sanctions and geopolitical tension. The lesson is clear: when shocks are geopolitical in nature, policy responses must also allow for practical flexibility. Presenting the current situation in that context allows room for temporary and carefully calibrated policy adjustments while maintaining long-term fiscal discipline. The first step is to optimise Pakistan’s existing energy mix; where possible, power generation should temporarily shift away from imported oil toward domestic gas, hydropower from dams, and the rapidly growing base of locally installed renewable energy. Pakistan has invested heavily in solar and other renewable capacity in recent years, and hydroelectric generation from dams remains one of the cheapest sources of electricity available. During a geopolitical oil shock, maximising these domestic energy sources can significantly reduce reliance on imported fuels. Beyond adjustments in power generation, Pakistan also has an opportunity to introduce a structural improvement in its transport fuel mix. Another practical policy lever available to Pakistan is the strategic introduction of biofuel blending in the national fuel mix. Pakistan already produces significant quantities of ethanol derived from molasses in the domestic sugar industry, creating an opportunity to partially substitute imported petroleum with locally produced fuel. Many countries, including Brazil, the United States, and increasingly India, routinely blend petrol with ethanol in the range of 10–20 per cent without requiring major changes to vehicles or fuel infrastructure. Introducing a structured national programme with blends of around 10–15pc could meaningfully reduce the volume of imported petroleum required for domestic consumption. At Pakistan’s current fuel consumption levels, even a 10–15pc blending programme could potentially reduce the national oil import bill by several hundred million dollars annually. Such a policy would deliver multiple benefits simultaneously. It would reduce pressure on the current account by lowering oil import volumes, help moderate retail fuel prices by incorporating competitively priced domestic ethanol, and stimulate agricultural and industrial value chains within the country. Most importantly, ethanol blending would convert the lessons of a geopolitical oil shock into a long-term structural reform, gradually insulating Pakistan’s economy from external energy disruptions while strengthening domestic energy security. Industries and power plants capable of switching from furnace oil to gas should be encouraged to do so on a temporary basis where capacity exists. Even a modest shift in energy consumption could reduce the national oil import bill during periods of high global prices. The second step is energy demand management. Governments around the world adopt short-term conservation measures during global energy disruptions. Reducing non-essential fuel consumption across government fleets, encouraging efficiency in transport systems, and optimising logistics can collectively reduce demand without slowing productive sectors of the economy. For step three, policymakers must protect the sectors that generate growth and foreign exchange. Export industries, agriculture, and logistics networks must remain fully supported. These sectors drive employment and economic activity, and they should not be constrained during a temporary energy shock. Finally, the government should focus on protecting disposable income for low and middle-income households. If purchasing power erodes further, the consequences ripple across the entire economy. Reduced spending leads to slower business activity, higher unemployment, and weaker GDP growth. Pakistan’s economy cannot afford such a contraction at a time when growth is already fragile. In the end, energy crises often reveal an important truth: economic resilience is not simply about having resources. It is about using them intelligently when circumstances change. The writer is the Director of Gul Ahmed Textile Mills Ltd. Published in Dawn, The Business and Finance Weekly, March 16th, 2026