巴基斯坦的經濟高度依賴進口石油。為了在國際油價波動的狀態下保護當地的消費者，政府對石油銷售公司提供補貼以促使他們在國內提供相對便宜的石油價格。然而在2008年,進口價格的上升導致了日益增長的預算赤字致使政府無法再維持石油補貼。政府決定逐步地撤銷補貼。2008年底國際原油價格的下降(每桶56.2美元)幫助了這一政策的實施。然而,政府繼續現有的價格出售進口石油的同時卻在削減補貼金額。
 

本文旨在調查這種變化對經濟和生活質量的影響,尤其是國防住房部門精英富有的社區:拉合爾。這篇文章的主要問題是DHA,拉合爾,巴基斯坦的居民由于國家補貼汽油的減少而受到了多大程度的影響？
 

為了評估這種影響,調查主要集中在居民和其關于運輸和商品價格的日常問題。通過對DHA的走訪，得到了一個當地居民的交通工具類型,對石油的依賴和其經濟活動水平的深入了解。

 

Pakistan’s economy is highly dependent on imported oil. To protect the local consumers from fluctuating international oil prices the government provides subsidy to the Oil Marketing Companies to provide oil at a relatively cheaper price domestically. In 2008, however, rising import prices led to a burgeoning budget deficit to a level where the government was no longer able to sustain the oil subsidy. and decided to gradually withdraw the subsidy. The fall in international price of crude oil ($56.2 a barrel) by end of 2008 helped implementation of this policy. The government, however, continued selling imported oil at the existing price while cutting subsidy amount.

 

This essay aims to investigate the impact on the economy and quality of life particularly that of the very elite and rich community of the Defense Housing Authority, Lahore. The lead question of this essay was To what extent the residents of DHA, Lahore, Pakistan, are affected by the reduction in subsidies on petrol by the state?

 

To assess the impact, investigation focused on the residents and their everyday problems related to transport and commodity prices. Visits to DHA provided an insight into the residents’ dependence on oil, types of transport available, and level of economic activity in the area. Several residents, businessmen and government officials were interviewed. Market researchers and entrepreneurs from the DHA area aided the investigation through interviews.

 

The investigation concluded that the residents of DHA experienced negative effects of the withdrawal of oil subsidies. It impacted their lifestyle compelling them to change consumption patterns. They suffered from limited and expensive transport accompanied with high food and commodity prices.#p#分頁標題#e#

 

Figure 1 Pakistan’s economy is highly dependent upon import of oil for energy. It consumes 324,000 barrels of oil per day, ranking 38th in the world [1] . Since 90% of oil is imported, it is faced with high international prices. With a rising inflation of 20.3% (in terms of consumer prices), and an exchange rate of 87 rupees to a dollar, imports prove to be very expensive for the local Oil Marketing Companies (OMCs). To shield the local economy the Government subsidizes oil to be sold at a lower fixed price in Pakistan [2] . OGRA (Oil and Gas Regulatory Authority) regulates the local oil price keeping in mind the consumer income and commodity prices. The government pays the price differential between the international and local oil price to OMCs. The Pakistan State Oil (PSO), owns 59.4% share in the White oil market [3] and is a leading OMC for oil based products with 65 percent share in the domestic market ( figure 1). PSO operates two distribution centers in Defense Housing Authority, Lahore, the area under study.

 

In July 2008 International crude oil prices peaked to $140 a barrel [4] , increasing Pakistan’s import bill by 52.21 % compared to the previous fiscal year [5] . The cost of the subsidy increased as the government tried to maintain the local price. This caused problems for PSO, as the government was not able to cope up with the price differential (subsidy). The cash flow in PSO suffered. The government was forced to implement the policy of gradually withdrawing oil subsidy to bridge the widening budget deficit. To Government’s advantage, international crude oil prices dipped to $38.12 a barrel in December 2008 (Appendix 1). Despite the fall in international oil prices, Pakistan maintained the existing oil local prices, denying consumers the benefit of reduced international price. Thus the Government saved on the oil subsidy bill.

 

During this period of high and low in international oil price, the domestic price of petrol was maintained at Rs.53.7 per liter. In February 2008, withdrawal of subsidy led to a rise in petrol prices within a month to Rs. 58.7 per liter. However, after the peak in international prices in July 2008 coupled with partial withdrawal of subsidy, petrol prices further mounted to Rs. 86.66 per liter in September. See figure 2 to observe mounting domestic oil prices.

 

DHA boasts a full range of economic set up with services ranging from restaurants, public transport, leisure clubs, cinemas, one major university (LUMS), domestic services, street markets, malls, schools, banks, etc. It is a fully equipped community with varying high middle class and high income ranges. This led me to the question, To what extent the residents of DHA, Lahore, Pakistan, are affected by the reduction in subsidies on petrol by the state?Focusing on DHA adds substance to my essay, as it will investigate the effects of subsidy reduction since November 2008 on the residents and employees considering the different economic characteristics of the oil market. The study confirmed that removal of oil subsidy directly affected all segments of the economy in DHA. The residents were forced to revaluate their lifestyles, in terms of daily usage of transport and commodities, resulting in the growth of substitute markets. This paper evaluates the effect of reduced oil subsidy on the residents of DHA.#p#分頁標題#e#

 

Methodology:

 

In order to answer the question, what has been the economic effect of reduced subsidies on petrol on the residents of DHA (Defense Housing Authority) Lahore, access to official documents from the Ministry of Petroleum, Oil and Gas Regulatory Authority, media reports and journals as well as public opinion was required. The approach adopted included interviews with Government officials and employees of Pakistan State Oil (PSO), along with questionnaires for DHA residents. In order to understand the situation, all stakeholders were studied.

 

To bring specific focus to the study, residents of DHA were asked to respond to questions on the effect the removal of oil subsidies in their daily lives. The questionnaire was designed to gage the level of awareness of the function of oil subsidies; impact on quality of life such as prices of daily commodities, food prices, transportation costs ; whether the living costs had increased in tandem with cost of oil and if rising inflation impacted on their life style, for instance change in their daily transportation routine, pattern of petrol consumption; to what extent did they utilize private/ public transport ,had they considered switching to alternative sources of energy to reduce expenditure.

 

The main OMC in focus is The Pakistan State Oil (PSO). An interview was conducted with the Zonal Marketing and Supply Manager in Lahore, Mr. Waqas Mazhar on the profitability level of the company after implementation of the subsidy withdrawal policy, and prospects regarding future supply trends.

 

Considering the significance of the government as a stakeholder, Mr. Zafar Siddique from the Federal Board of Revenue was interviewed as a source of primary research. The objective was to understand the logic behind subsidy withdrawal policy and future price plans, potential investment in public transport and alternate energy sources.

 

Having studied the three main stakeholders, I was able to understand various dimensions of the policy and its intended impact. Knowing the level of demand for oil and the potential level of supply, affected greatly by government intervention, allowed me to perceive the impact it had on the resident’s lives.

 

Data and analysis

 

Price stability is one of the main objective of the government ‘s policy. Government’s subsidy to Oil Marketing Companies to protect consumers from market fluctuations is a protectionist policy. Subsidies allow industries to manufacture and supply more by reducing the cost of production. Mainly two types of subsidies are utilized, specific subsidies and ad valorem subsidies. Specific subsidies are fixed amount of money provided to a firm per unit output. Added value subsidies, also known as percentage subsidies, are paid when a government pays a percentage of the selling price of the product to the producers. The Pakistan Government has subsidized oil because it is absolutely essential for its economic progress as its major industries depend on energy produced by oil.#p#分頁標題#e#

 

Petrol has price inelastic demand and supply in the short run. Price elasticity of demand (PED) is the measure of change in the quantity demanded in response to a change in price. Price elasticity of supply (PES) is a measure of change in the quantity supplied in response to a change in price. In case of petrol, both PES and PED are inelastic. In other words, for a change in price, the change in quantity supplied or demanded is relatively less. In Pakistan the supply of petrol is price inelastic because Pakistan is not an oil producing country. The Oil Marketing Companies (OMCs) are limited by the imports. They can only increase supply depending on their surplus. The demand supply diagrams are shown in figure 3.

 

Effect of specific subsidy:

 

Figure 2

 

Figure 3 [6]

 

Figure 4 illustrates subsidy on petrol. In the short term the demand and supply are both price inelastic because of limited availability of substitutes. The direct impact of subsidy is on the supply curve, which shifts to the right. This causes the international oil price per liter to decrease to the local price. Because of the inelastic nature of petrol, the change in the quantity demanded and supplied is relatively less than the change in price.

 

Figure 4 [7] : Producer Revenue after Subsidy (oil Subsidy)

 

Figure 67:

 

Figure 7 [8] : Cost of subsidizing petrol to government

 

Figure 5 illustrates the effect on producer revenue. The government subsidy on oil, increases the producer revenue, encouraging them to supply more in to the market.

 

Figure 6 illustrates the fall in price of oil, and the reduction in cost to consumers because of the subsidy on oil. The consumers are saving as a result of the reduced price, but paying for the extra quantity being demanded.

 

Figure 7 shows the price paid by the government to the producers. Gradually withdrawing the subsidy on oil decreased price and consumer expenditure in Pakistan.

 

The diagrams above show that the government subsidy kept the local price low as against high international oil price. The government paid the price differential (subsidy) to the OMCs, allowing them to lower the price to the OGRA set local price. The subsidy, therefore, fully benefited the consumers. The revenue earned by OMCs increased but not directly as a cause of the subsidy, but due to expansion in demand. Their revenue rose from being the 0-import price-E-Q to being 0-import price-x-Q1 (figure 7). Therefore, the benefits of the subsidy were enjoyed both by PSO and the residents of DHA. Similarly the profit margin of dealers and OMCs which was fixed at 4 percent and 3.5 percent also witnessed massive growth.

 

As the supply curve shifts to the right and price decreases, the consumer surplus increases, meaning consumers are paying a lower price than the one they were willing to pay. The illustration shows that the subsidy is benefiting the consumers.

 

Affect of Withdrawal of Oil Subsidy

 

The above illustration shows the effect of withdrawing the oil subsidy. The supply curve will shift to the left, and the demand curve will experience a contraction, as the quantity demanded decreases. Since the demand for oil is highly inelastic the reduction in quantity demanded will be minimal compared to the change in its price. There will be a loss in consumer surplus in contrast to a gain in producer surplus, who now will be selling for a higher price than they were willing and able to sell at.

 

The first and foremost argument in favor of oil subsidies is that it allows oil to be sold at a reduced price in the local market. This leads to low transportation and power costs, low food prices and other products. It lowers inflationary pressure and encourages higher industrial production.

 

The Pakistan government used oil subsidies as an incentive for the producers to sell oil at the government regulated low fixed price. In the past, these fixed prices have shielded the population from the fluctuating international prices.

 

Subsidized oil prices helped keep the cost of production relatively low and prices of consumer goods at affordable levels. The rate of inflation remained single digit. As the withdrawal of oil subsidy began, the Consumer Price Index in Pakistan rose by a record level of 25.3 percent. The nonfood i.e. energy was the primary source of inflation during the first ten months of financial year 2008-2009 [9] . High level of inflation and high cost of living becomes a politically sensitive issue. Therefore, keeping oil prices low by subsidizing its cost has remained part of the government's policy to ensure political stability in the country.

 

The imposition of subsidy on petroleum came with a heavy price tag for the government. As the prices of crude oil peaked to $144 a barrel in 2007, the subsidy costs to the government kept increasing. The government was not able to sustain the subsidy, resulting in delayed payments to PSO, other OMCs and the refineries. The cash flow was disturbed and by December 2008, the government owed Rs. 55 billion [10] to Pakistan State Oil (company in focus), on account of delayed payments. To maintain the subsidy, government had to either borrow from the State Bank, which would increase liquidity resulting in further inflation or to reduce budget allocations on development, health and education sectors which was not a politically popular move. Both the choices were unfavorable for the government and the people of Pakistan.

 

Oil prices have a direct impact on transport, food and energy costs. However, their indirect effect is felt across the economic spectrum. The consumer price index is associated to Oil pricing, since oil acts as an input into many products. Due to subsidized oil, the cost of production for many industries decreased. Since their variable costs were low, they were not forced to purchase more efficient fixed capital. Therefore, resources were inefficiently allocated and production resulted in wastage and pollution. In the long run inefficiency of this sort leads to market failure.#p#分頁標題#e#

 

Over time, subsidized oil prices encouraged its consumption. Oil characteristics show that even though demand for oil is believed to be inelastic in the short term, it is supposed to be elastic in the long run. The world economy is gradually changing fuel consumption patterns, resorting to alternative, more efficient and environmentally friendly energy resources. The oil subsidy acts as a disincentive against development of alternate energy resources like solar, wind, hydro, biomass and nuclear energy. Affordable prices kept consumers from seeking other sources. The government also did not pay enough attention on infrastructural development for the alternative resources.

 

Lastly, the Refineries have hugely benefited from oil subsidy. They refined crude oil at low subsidized costs. The Government still allowed them to impose a 10% duty [11] in 2006 to facilitate upgradation of the refining standards to European standards. In violation of the understanding, no attention was paid by the refineries to improve their standards even as they continued to benefit, making 8-11 dollars per barrel of oil whereas in Singapore refining costs are 3-4 dollars a barrel.

 

The government used subsidies as a political tool to control inflation. After the assassination of Benazir Bhutto in 2007, her Peoples Party had come into power in 2008 promising “Bread, Clothes and Housing” for all. On the other hand, the government was in danger of default with a rising current account deficit. At the macroeconomic level, the government had to expose Pakistani people to international oil prices. The costs of subsidizing oil had accumulated and some of the above mentioned factors as well as pressure from the World Bank and the IMF persuaded the government to finally begin to reduce subsidy on oil. To avoid default, a new policy was adopted to gradually reduce the oil subsidy instead of withdrawing it completely. As the international prices of crude oil fell to $33 per barrel 2009, it became easier for the government to begin to gradually remove the subsidy.

 

Short term and Long term effects on DHA Residents on withdrawal of oil subsidy

 

Transportation market

 

The residents of DHA are among some of the most influential and wealthy people in the country. For transport, private vehicles are utilized extensively. According to the survey, on average, every household has two to three cars. With the gradual removal of subsidies and consequent high prices of oil the usage of cars and petrol decreased. Petrol and cars are complementary products. See illustration below:

 

Increase in petrol price led to decreased demand for cars, causing the demand curve to shift left in the long-run.

 

In DHA, people began to economize vehicle usage by reducing their frequent trips to the market, and pooling for school trips. Households started buying provisions on weekly basis, rather than daily basis. Despite being very well off, they converted to cheaper and environment friendly fuels as CNG (Compressed Natural Gas). Some sold one of their cars to ease the burden on monthly budget. Once high oil prices were imposed, the residents in DHA were gradually forced to adopt more efficient means of energy utilization. Further more in long- run this will lead to the promotion more environmentally friendly vehicles, and hybrid cars may also be introduced into the Pakistani market.#p#分頁標題#e#

 

Externalities occur when a third party is affected by consumption or production of a good or service. Oil causes a negative consumption externality, being a heavy environment pollutant. As the DHA residents move towards low polluting alternatives like CNG, the negative externality would decrease, as shown in the illustration below.

 

In the long run, the marginal private benefit will move towards the marginal social benefit, until the economy achieves a socially efficient point in terms of fuel consumption patterns.

 

The impact on local business community was also considerable. Management of restaurants like McDonald, KFC, Salt & Pepper, The Village and Chatkhara, that once ran thriving businesses claimed to have experienced a decline in their sales by 10-12 percent (statements by managers). High quality departmental stores like Haji KarimBaksh, and PotPouri, also suffered a similar trend and were forced to temporarily close some of their sections. Discouraged by reduced sales and low liquidity on the part of general public the management of these firms shifted the quality products with cheaper brands. This also becomes necessary due to high consumer price index.

 

The Consumer Price Index (CPI)

 

In case of Pakistan, the CPI is strongly associated with oil prices. The cost of manufacturing, production and transportation feed into the price index. This as a result increases inflation which is defined as the persistent increase in the average price level in the economy, measured using the consumer price index [12] . In particular this type of inflation would be labeled as Cost push inflation, as the cost of production has increased. As earlier stated the CPI climbed to 22.3 percent during July 2008 to April 2009 according to the Economic Survey of Pakistan 2008-2009 [13] . An increase in oil price impacted the CPI. The Economic Survey acknowledged that inflation in Pakistan accelerated at a rapid pace mainly due to the gradual withdrawal of subsidies on gas, electricity and oil and weaker rupee-dollar exchange rate. An interview with Market Research Director, Ms.Saima Qamar confirmed that the commodity prices increased far more compared to the oil prices. Although oil prices leveled off, commodity prices kept rising, resulting in considerable erosion of the purchasing power [14] .

 

Commodities like sugar, salt, milk, water, and wheat being essential, have inelastic demand. The food group was the most significant contributor to inflation averaging to 26.6% during financial year 2008-2009, the highest food price index since 1980. Non- food inflation, mainly driven by price of POL and resultant transportation cost, rose by 19 percent as against 6.8 percent the previous year. [15] Ms. Saima Qamar stated that on average an increase of 70% was witnessed in consumer spending in terms of commodities mainly food (appendix 5). This would have an obvious impact on saving, if the inflation rate is higher than the real interest rate, then the money saved in the bank would be worth less with time. This would discourage saving as the residents would prefer to spend it right away. In the long-run fewer savings results in lower levels of investment, therefore the economic growth would be slower.#p#分頁標題#e#

 

Substitutes

 

CNG is a strong competitor of Petrol in Pakistan. In 2008, Pakistan overtook Argentina as the world’s biggest CNG consumer. Despite the initial high installation cost of CNG, people prefer it to petrol, as it is much cheaper. This illustration shows that as the price of petrol increased, the demand for CNG increased correspondingly:

 

All official vehicles are currently running on CNG in Defense Housing Authority. A family with two cars has converted one (locally manufactured) to CNG look at interview with resident’s appendix 4 and 5. There are in total 1,100 CNG stations in Pakistan. [16] The demand for CNG has increased because it is a cheaper substitute as its price has risen only by 47% as oppose to petrol where it has increased by 100%, in the past three years. Because of the removal of subsidies on petrol the government has cut down on duty and tax on equipment used for CNG conversion and refueling. The government is encouraging consumption of CNG over petrol because it is in their favor to reduce the import bill of oil and as seen in the diagram above the increase in price of petrol has caused for the increase in demand for CNG in DHA.

 

With almost no alternate transport facility, the residents of DHA are forced to use personal vehicles. The common means of transport available include taxis and rickshaws but they are not considered comfortable and trendy or even safe by residents. This means of transport turns out to be more expensive then private transport.

 

As energy prices remain high, the residents would be forced to use their surplus income to fulfill their inelastic demand for oil. Consequently, in the long run there would be a period of low economic activity.

 

Conclusion:

 

The research confirmed the initial hypothesis that the withdrawal of subsidies on oil in 2008 by the government of Pakistan would affect the residents of DHA adversely. The presumption that withdrawal of subsidy on oil prices would have an inflationary effect on the transportation market and CPI index was also shown to be correct.

 

The anecdotal witnesses and interviews conducted confirmed that even the rich community living in DHA experienced the burden of the government policy. Their monthly household budgets increased and the residents were forced to cut down on consumption of economic goods. They expressed their disappointment, through their responses to the questionnaires. Concerns about lack of availability of substitutes, and lack of government initiative in the alternative energy sector surfaced. The poor quality of public transport, forced them to rely on the expensive private transport. Thus, majority of the residents changed their cars from petrol fueled engines to the only substitute, CNG fueled engines. Thus, the CNG market benefitted. The consumers instead had to cut down on their other essential expenditures, and spend their savings. This was confirmed, by empirical study of the sale pattern at fashionable outlets and restaurants as sale for food, entertainment, leisure and luxury products declined. Although the research focused on one locality and a fraction of Pakistani society, the impact could not be ascertained from a national perspective although most of the qualitative data was derived from official sources.#p#分頁標題#e#

 

The research conducted was prone to limitations as DHA involves an entire economic setup, therefore incorporating every factor into the research proved to be difficult. Since the research was focused on DHA, and secondary sources did not provide information on DHA in particular, the research relied on a few interviews of the residents, which then were used to generalize the effect on DHA. Therefore the information collected may not necessarily be true for all residents. Otherwise, the interviews conducted of PSO and government representatives are subject to objectivity, and therefore the information provided may not be completely accurate. It also proved to be difficult to acquire accurate and exact figures for quantity demanded by the residents. The research did not have access to private consumption patterns of residents of DHA.

 

Through the research a particular question surfaced, Why weren’t the benefits of reduced international oil prices since late 2008, passed on to the consumer’s of DHA in Pakistan. Rather the price of oil was raised substantially to bridge the budget deficit, thus passing on the burden to the consumers. Is it not the government’s responsibility to maintain a low inflation rate?

 

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