Growth in oil demand: quite organic – BR Research


Consumers have spent 50% more on filling petrol tanks in the 10 months of the financial year so far than last year, amounting to Rs 1.3 trillion. High-speed diesel (HSD) spending at Rs 1.1 trillion is not too far behind, up 44% year-on-year. Given the frantic calls for higher prices to curb demand, much of this spending is expected to be price driven.

But it’s not. For gasoline which is up 30% year over year (from an already high base, do you think), demand is up 10%. For HSD, a 24% increase in average prices could not prevent demand from increasing by 21%. Gasoline and HSD prices are on average the highest on record for the 10 month period.

The jury is out on whether another 30% price increase could have hurt demand. This may or may not be the case. The merits of organic demand in a growing economy, with gradually changing consumption patterns and urbanization, should not be set aside for the sake of simplicity. When a 30% price increase leading to unprecedented pump prices couldn’t reduce demand, who’s to say the next 30% sure would?

This does not in any way mean that an average consumer would not reduce their oil expenditures when prices increase significantly. But you have to make room for an increasing number of wheels on the roads, creating new demand. Nearly 1.4 million two-wheelers and just over 0.17 million cars were added in 10M-FY22. Safe and conservative estimates of no more than 10 liters per month for a bicycle, and four times as much for a four-wheeler – that alone is a quarter of a billion liters extra in ten months so far.

Note that HSD consumption was still not at its peak four years ago. One would assume that the scale of economic activities has increased over the past four years. HSD is known to have a higher incidence of contraband than gasoline. Looking at the numbers, it seems that HSD smuggling is on the rise, and rising prices are also a more compelling case of a higher incidence of smuggling. Either way, there doesn’t seem to be much room to reduce organic HSD demand, especially when it didn’t even match FY18 consumption.

Double digit annual growth in gasoline and HSD consumption has been the norm in Pakistan for over a decade, with the exception of FY19-21 (negative economic growth followed by Covid). The oil subsidy is an entirely different topic and has reached significantly higher levels than when it was announced. Fiscal realities suggest that paying the oil subsidy bill is a Herculean task and one that will be difficult to keep going. Dropping this will ease the pressure on the fiscal front.

But this does not guarantee a drop in demand large enough to have a significant impact on the external accounts front. Reduced working days and commercial opening hours are also welcome. But be aware that this would not generate massive savings, as even the strictest movement restrictions during the Covid peak only resulted in a slight drop in demand. In short, raise the price for all intents and purposes, but only for tax relief, and not necessarily to reduce demand.


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