Higher oil prices may trigger a global recession

· Oil prices soared to the highest level since 2008 after the US hinted on a potential embargo on Russian supplies with its allies. Brent index spiked to above US$139/bbl, before easing back to below US$130/bbl. The US statement came after a temporary ceasefire between the warring states failed.

· Higher oil prices may trigger a global recession (like one triggered by Middle-eastern oil embargo of 1970s) and Pakistan will be no different. In Pakistan’s case, the risks get magnified further as the country is already struggling with elevated CAD which may touch around US$18bn in FY22 (~5.2% of GDP).

· The country also announced a relief package of ~PkR250bn—PkR300bn aimed at containing fuel prices for the masses which was to be funded through higher tax collection. However, as oil prices touch new highs, the fiscal space will quickly erode and GoP will likely use OMC sector’s books in order to fund the outlay. This will create liquidity concerns for the sector the payment under price differential claims are delayed (same as in 2008).

· Should international oil prices remain downward sticky, the GoP may have to (or should) roll-back some of the incentives announced in the recent relief package. The dynamics of energy chain will worsen significantly as circular debt accretion will be much faster as the price pressures are not passed on to the end consumers. Consequently, we may see further de-rating in country’s energy chain.

Courtesy – AKD Research

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