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Irrational increase in oil prices

Irrational increase in oil prices

The oil prices dropped in the international market, including the US benchmark, marking the lowest settlement in a couple of months. Reports suggest the number of active US rigs drilling for oil rose this week but abrupt fall in prices in the international stock markets has contributed to losses in the oil business. Ironically, prices of petroleum products have been increased in Pakistan, thanks to unchecked actions by the government and inability of the opposition parties to take a stand. Earlier, the government had depreciated the local currency without considering its consequences and now it has increased the prices of petrol and the related products to collect more revenues. According to economists, the economy of Pakistan is poised to face tough challenges in the second half of the current fiscal year. The country is heavily dependent on oil imports the prices of which are steadily on the rise at home, though dropping in the world markets. This added confusion in the already beleaguered economy as the oil prices were, somehow, kept stable in the country. Though the oil prices are expected to increase to $70 per barrel in six months, the current situation did not make sense to increase its prices in the domestic market.

The State Bank of Pakistan (SBP) and a renowned international investment bank, JP Morgan, have expected an increase of $12 per barrel in the prices of international oil benchmark. An increase in oil prices in the international market brings windfall for the government as increase in prices gives it an excuse to enhance prices for its own benefit. On the other hand, dollar is weakening against major currencies of the world, but its value is steadily increasing in Pakistan, which adds more confusion to the national economy. Unfortunately, increase in the oil prices always left domino effects on the entire economy and induces cost-push inflation in the business and trade sectors. An increase in the oil prices not only enhances the cost of transportation but also the cost of production of the exportable items. The expensive fuel also leaves inflationary pressure in the banking sector. The uptick in oil prices also affects the import bill which widens the current account deficit. However, when oil prices are decreased, the government refuses to pass its benefits to the people. Import of oil has become a good business for the government.