Author

Imran Khan

Degree

Master of Business Administration Executive

Faculty / School

Faculty of Business Administration (FBA)

Year of Award

2016

Project Type

MBA Executive Research Project

Access Type

Restricted Access

Executive Summary

Oil is an important resource and the demand for oil is continuously increasing. Previous research shows that oil price shocks impact the economic activity. Pakistan’s economy is mostly dependent on agriculture, industrial & service sector, textile, food processing etc., therefore rise/drop in crude oil prices impacts both oil exporters and importers Increase in oil price resulted in increase in cost of production, which in turn increases inflation, reduced purchasing power, increases in unemployment, decrease in consumption spending and investment and as a result the economic growth declines.

In history, there are numbers of factors that are contributing to the Fluctuation in oil prices ranging from political to economical. Recently, over production from OPEC (Oil producing and exporting countries) like Saudi Arabia, Iraq and Kuwait resulted in higher supply and weaker demand which also contributed to increased instability in oil prices. This weaker demand has created substitution effects, which has lowered the commodities prices in general. Benefits obtained by oil importing countries in this lower oil prices in current scenario is offset by other shocks in the economy like decline in remittances and foreign investment.

Purpose of this work is to determine the crude price fluctuation on GDP of Pakistan and examine the relationship (long run) between the macroeconomic variables. Analysis carried out using Time series helps to determine the long run relationship by using different econometric approaches. Oil price shock / fluctuation included in the models and its effect on GDP is determined, in case of Pakistan.

Result shows that there is a positive relationship observed between economic growth and exports, consumption spending and Investment spending. Negative relationship observed in case of economic growth and inflation (Consumer Price Index). Exports and Imports are important for determining the overall growth of the economy. High oil prices tend to slow down economic growth and for Pakistan, there will be decline in Net exports.

In current low oil price situation, it seems that it is beneficial for the economy of Pakistan, but true picture will be seen in the long run. Result also shows that in current situation, oil prices are low, but still Pakistan exports are declining. This is due to reduce in commodity prices from around the world by the oil exporting / developed countries. Their exports are badly impacted by this low crude oil price market. This is cyclic effect, supply and demand gap.

In a nutshell, oil importing countries like Pakistan, is largely dependent on it. Energy mix of Pakistan shows high percentage of usage of residual fuel oil and less dependent on cheapest form of energy generation (Coal, Wind, Hydel etc). Therefore, for Pakistan oil demand will always be high, as it is an important input for many manufacturing and producing industries. Thus, it will have a huge impact on economy if sudden/irregular fluctuations in oil price continues to occur in future.

Pages

87

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