Pakistan was one of the oil-importing nations that experienced hardship in 2022 as a result of rising commodity prices. Consumers felt the pinch at the pump due to the sharp rise in the price of refined goods like diesel, which significantly strained their trade balances. Government authorities in Pakistan must be proactive in preventing future crises due to the unstable nature of the global market.
In contrast to lighter distillates like gasoline and heavier distillates like furnace oil, diesel is a type of medium distillate. These distillates are created, as their name suggests when crude oil undergoes the distillation procedure and further steps of processing in an oil refinery.
What sets the middle distillates apart is that they are mainly used in the commercial sector. They are consumed by freight transportation, agriculture, manufacturing, and other industries. Their demand, therefore, primarily comes from economic activities.
As the world economy recovered from the epidemic in 2022, demand for diesel surged. Additionally, supply-side challenges include insufficient distillate output in the US and China, two of the world’s largest manufacturers of refined goods, as well as the conflict in Ukraine and Russia, resulting in record-high refining margins for diesel. The difference between the cost of processed goods and the price of crude oil is known as the refining margin.
Midway through 2022, the refining margins for gasoil, the raw material for diesel, rose to an unprecedented high of more than $70 a barrel in Asian markets. Although it has now dropped to a range of $30 to $35 a barrel, it is still substantially higher than the single-digit levels it frequently traded in 2021.
Historically, almost 40% of Pakistan’s diesel supply has come from foreign markets. The five oil refineries in the nation have the capacity to produce all the fuel needed. However, because of ongoing industry problems that politicians haven’t yet addressed, these refineries frequently run below capacity. Due to this, Pakistan has no choice but to buy fuel, putting pressure on its foreign exchange reserves.
According to PBS data, Pakistan imported 5.39 million MT of high-speed diesel (HSD) in the most recent fiscal year, which concluded in June, primarily from Kuwait and the UAE, for a cost of $3.85 billion (average exchange rate of Rs178.12 per USD).
This shows the high cost of importing HSD, despite low refining margins in the latter half of 2021. With persistently high refining margins, the import bill may remain elevated in the future as well.
The future of diesel prices is uncertain, with the potential for both bullish and bearish scenarios to unfold that could impact refining margins.
