The Article is Published in Money Matters on Monday January 6, 2014
Energy is an essential component of an economy, which drives the growth of manufacturing and services sectors and helps run tube wells for the agriculture sector. Hence, it is one of the most vital inputs to boost a country’s GDP growth.
The last six years’ export data reveals that the country’s exports increased from $17 billion in 2006-07 to $24.8 billion in 2010-11. Nevertheless, exports declined to a certain extent in 2011-12.
In today’s age of globalisation, it is critical for countries to open up their markets to global players and for export-oriented sectors to adopt innovative methods of production to increase the country’s exports.
The energy shortages will have an adverse impact on exports if the technology we are using in our production sector demands more energy for more production.
Here is a research question for us that can we associate our exports performance in the last six years to technical effect or government was able to divert sufficient resources to exports-oriented industries.
Muhammad Shahbaz from Comsats has similar findings in his research paper, presented at the conference. He emphasised on the use of lower energy-intensive technology for production, which has lower CO2 emissions as well as lower cost of production.
Since the oil prices are creeping up and we are dependent on the use of furnace oil and thermal energy, it is difficult to control the prices of energy in the long run. Although the energy prices are administered prices and the prime minister can ask for energy prices not to be increased, that may have adverse impact on the overall economy. Since the government needs to give subsidies if it doesn’t increase prices and later on borrow the same amount either from the schedule banks or the State Bank of Pakistan. Therefore, inflation is inevitable either way. It can be stopped or mitigated for a short period but eventually it will go up.
More alarmingly, since the negative consequences of BP oil spills remain, cost of oil exploration will be higher in future. Thus, we may not experienced a decline in oil prices due to decline in production. Instead, the prices of oil will increase. There is a need for energy mix to avoid the humungous oil import bill in future which further dampens the problem of balance of payments and then asking for short-term loans from IMF to correct the balance of payments problems.
Another frightening situation may arise if we do not change the prevailing energy-mix situation. Even though the share of thermal energy will decrease in the overall energy mix, overall production remains the same. We may experience an increase in the oil import bill. I U Mangla and Jamshed Uppal, foreign professors from Western Michigan University, USA, and Catholic University, USA, estimated that if dependence on oil to produce electricity continues, by 2024-25 we may need $20-$24 billion just to cover the expenses of the oil import bill, which currently stands at $15 billion. Therefore, as suggested by Shahbaz we need to import energy efficient plants to reduce energy intensity. Moreover, as Mangla and Uppal suggested, we need to increase our exports to earn more foreign exchange. Export earnings can be increased through value-addition of our products. One way of value addition is branding which I have discussed in my article in Money Matters a few weeks ago. Vision 2025 has also emphasised on the exports promotion through value-addition. Nevertheless these policies have failed in the past due to lack of available infrastructure, especially energy supply, in the last few years.
Energy mix, in a nutshell, is necessary to mitigate the adverse impact of increase in oil prices. Increase in exports earnings is inevitable for the country to cope the problem of increase oil import bill. This implies that the importance of energy will be the focus of research for the next few years since everyone is talking about energy shortages, climate change and clean energy. More importantly, clean energy is the topic of future research projects since the world is moving towards clean and renewable energy and Minister for Planning Development and Reforms Ahsan Iqbal has also emphasised the use of clean and renewable energy projects at the PIDE 2013 AGM. The current government is looking forward to setting up plants to produce clean and renewable energy in Pakistan, such as usage of clean coal, wind power, and solar power. Therefore, we can expect that the problem of energy shortage will be overcome and the dependence on thermal energy will be lessened.