A sharp rise in global oil prices triggered by escalating tensions in the Middle East is increasing risks to Pakistan’s economic stabilization, particularly for the current account, inflation, and foreign exchange reserves.
The global benchmark Brent Crude climbed nearly 10 percent after Iran launched retaliatory strikes, heightening concerns over potential disruption in the Strait of Hormuz, a critical route for global energy shipments. Although the strait remains open, tanker traffic has reportedly declined significantly due to security concerns.
Pakistan, which imports around 85 percent of its crude oil needs, is highly exposed to such price shocks. Analysts estimate that every $10 per barrel increase in oil prices could widen the current account deficit by $1.5 billion to $2 billion. If prices approach $100 per barrel, the annual impact could range between $5 billion and $7 billion, potentially reversing the $2 billion surplus recorded in FY25.
Domestic crude production stands at roughly 80,000 barrels per day, meeting less than 20 percent of total demand. Higher oil prices also pose inflationary risks. Economists estimate that a $10 per barrel increase typically adds 0.5 to 0.6 percentage points to headline inflation, at a time when inflation has eased to about 5.8 percent from peaks above 30 percent in 2023.
The impact extends beyond fuel costs. Electricity tariffs may rise through fuel price adjustments, as power generation relies partly on imported oil and regasified liquefied natural gas. Transport and food prices are also sensitive to diesel costs, given Pakistan’s dependence on road freight. In addition, increases in fuel prices are often accompanied by higher Petroleum Development Levy collections, further raising consumer costs.
Energy imports remain a structural vulnerability. Pakistan imports about 29 percent of its natural gas, 50 percent of LPG, and 20 percent of coal requirements. The energy import bill stood at $17.5 billion in 2023 and could rise further if global prices remain elevated.
To reduce import dependence, the government recently awarded 23 offshore exploration blocks covering around 53,500 square kilometres. The blocks were allocated to consortia led by Oil and Gas Development Company Limited, Pakistan Petroleum Limited, MariEnergies, and Türkiye’s Türkiye Petrolleri Anonim Ortakligi. Initial exploration commitments total $80 million, with potential investment rising to $1 billion if drilling progresses.
Pakistan is also estimated to hold over 9 billion barrels of shale oil and 105 trillion cubic feet of shale gas. However, developing these reserves would require substantial investment. Exploration could exceed $5 billion, while extracting even a portion of the country’s 235 trillion cubic feet of natural gas reserves may require $25 billion to $30 billion over the next decade.
