Energy crunch, hard choices

The energy crisis is real. Even if the war stops today, it will take months for energy supplies and prices to normalize. In fact, they may settle at a new normal. Pakistan must prepare for a prolonged adjustment. First, petroleum prices should be allowed to absorb the shock of higher international prices, because that is the only credible way to bring consumption down. An aggressive levy on high-octane may make for a catchy headline, but it does little to address the real problem. Pakistan does not have the energy or foreign exchange reserves to let consumption continue unchecked. The priority must be productive energy use. Residential and transport consumption will have to be curtailed. Working from home should be encouraged wherever possible. SBP should ask banks to run branch staff on a rotational basis, and other sectors should follow suit. Gas supplies are going to remain tight, so preference must be given to industry, even if that means load-shedding for households in both gas and power. Petroleum adjustment has to come through pricing. This is where the pain will be felt most, because Pakistan relies heavily on private transport for commuting and on trucking for the movement of goods. Consumption must be restrained through both pricing and administrative measures. A higher levy on high-octane is reasonable, but high-octane accounts for only a small share of total fuel use. Even a very high levy on it will do little to reduce the subsidy burden on petrol and diesel. The prices of those products will have to rise. Gas shortages are more serious because RLNG imports are no longer available. The government has increased domestic production by 400 mmcfd, but that will still not be enough to meet total demand. Some curtailment is unavoidable. From a productivity standpoint, the highest priority should go to the processing industry. Domestic demand may ease somewhat as the season for space and water heating ends, but household consumption, including stove use, will still need to be managed. Large fertilizer plants should continue to receive gas, both because they operate on dedicated lines and because food security must remain a top priority. LNG previously supplied two smaller plants, and some rationing there can be expected, especially since the country is entering this period with reasonable fertilizer stocks. The power situation is also likely to remain strained. Because of transmission constraints, summer demand in Punjab still depends on gas-based plants. To be fair, Pakistan’s overall energy mix has improved meaningfully over the past decade, with a larger share coming from indigenous and lower marginal-cost sources such as nuclear, local coal, and Thar coal. Some plants still run on imported coal, but coal prices are not rising in line with oil. Overall, Pakistan’s electricity import bill should not rise sharply, and in principle there is enough generation capacity to replace RLNG-based output. The problem is not only generation. It is location. The surplus sits in the south, where nuclear and coal plants are concentrated, while much of the demand is in the north, where LNG-based generation has played a larger role. Because transmission expansion has lagged, cheaper power cannot always be moved to where it is needed most. That means gas supply to the power sector will be lower, and load-shedding may return across much of Punjab once summer air-conditioning demand starts to climb. Part of the shortfall may be covered by older and less efficient furnace oil plants, but that would likely push up the fuel charges adjustment. In short, the situation is tight and austerity is unavoidable. The sensible response is to prioritize essential and productive consumption while curbing the rest. And if Pakistan wants to avoid a balance-of-payments crisis on top of an energy shock, the exchange rate will have to adjust, and SBP should begin considering restrictions on non-essential imports, including cars.

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