Growing Oil Prices and Their Impact on Pakistan’s Economy

This article is written by Major (r) Haroon Rasheed.

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As geopolitical tensions in the Middle East continue to rise, the economic ripple effects are beginning to reach far beyond the conflict zone. The ongoing war between Israel and Iran, now entering its second week, has already caused significant volatility in global oil markets—posing a serious threat to fragile economies like Pakistan.

Oil Prices on the Rise

Since the beginning of June, international oil prices have surged sharply—from $60–63 per barrel to $76–77 per barrel. This price hike, driven by uncertainty surrounding the safety of oil supply routes, particularly the Strait of Hormuz, is alarming for countries that heavily rely on oil imports.

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Pakistan is one such country. With an annual oil import bill of approximately $14.6 billion, oil makes up nearly 27% of Pakistan’s total imports, which stand at $53.5 billion. If oil prices continue to climb, even a modest increase could raise the import bill by over $1 billion, pushing it to $15.6 billion or higher.

Strait of Hormuz: A Global Chokepoint

Iran, the third-largest oil producer within OPEC, contributes 3.3 million barrels per day to the global supply. Moreover, around 18–21 million barrels pass daily through the Strait of Hormuz—a narrow but crucial maritime chokepoint between the Persian Gulf and the Gulf of Oman. If the conflict escalates further and Iran decides to block or target this passage, it could disrupt nearly 20% of global oil shipments, sending oil prices skyrocketing.

The possibility of U.S. or NATO intervention increases this risk. A broader war would not only lead to increased military expenditures globally but also cause oil-dependent nations like Pakistan to face severe fiscal and energy-related challenges.

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The Role of Overseas Pakistanis and Remittance Cushion

Amid these brewing challenges, overseas Pakistanis have emerged as a stabilizing factor for the national economy. During the current fiscal year, remittances have exceeded $34 billion, helping to generate a $1.8 billion current account surplus—a rare and welcome development for Pakistan.

This surplus provides some breathing room against rising oil costs, offering a temporary cushion against external shocks. However, if oil prices breach the $80 or even $90 per barrel threshold, this financial buffer could quickly evaporate, putting additional pressure on foreign exchange reserves and the Pakistani Rupee.

A Perfect Storm: Dollar Crunch and Growth Targets at Risk

Pakistan is already grappling with a severe dollar liquidity crisis, worsened by heavy external debt repayments and declining exports. Any sustained increase in oil prices will deplete reserves faster, force the government to borrow more, and likely weaken the currency—leading to imported inflation and rising fuel prices domestically.

The GDP growth target for FY2025, already modest, may become increasingly unattainable under such pressures. Higher energy costs will slow down industrial output, increase transport and electricity tariffs, and contribute to cost-push inflation—squeezing the purchasing power of ordinary citizens.

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Policy Recommendations

To mitigate these risks, Pakistan should urgently:

• Diversify its energy mix by accelerating renewable energy projects (solar, wind, hydro).
• Re-negotiate oil credit facilities with friendly countries like Saudi Arabia and UAE.
• Improve domestic oil storage capacity and strategic reserves.
• Strengthen trade relations with non-traditional markets to boost exports and inflows.
• Enhance fiscal discipline and transparency in public spending to restore investor confidence.

Conclusion

The global oil crisis triggered by the Iran-Israel conflict may just be beginning. For Pakistan, a country already on the economic edge, these developments pose a real and immediate threat. Policymakers must act swiftly and strategically to shield the economy from external shocks while preparing for long-term energy independence.

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This article is written by Major (r) Haroon Rasheed.