Economic Impact of Pakistan’s Oil Discovery

Imran Khan, the Prime Minister of Pakistan recently stated that Pakistan is very close to an oil and gas discovery that would completely change the fortunes of the cash strapped nation. It is rumoured that Pakistan’s declarations are based on the briefings provided to them by ExxonMobil which is one of the largest oil companies in the world. This could mean that the claims being made by Pakistan are credible. This could also mean that the economics and geopolitics of the Indian subcontinent would change completely if such a discovery is made

In this article, we will have a closer look at the possible economic impacts of Pakistan’s oil discovery.

Quantum of Oil Reserves

The quantum of oil reserves being reported in Pakistani waters is huge. According to reports by ExxonMobil, the amount of oil would be enough to put Pakistan in the list of top 10 oil producers in the world. ExxonMobil has also stated that the amount of oil reserves in Pakistan would be more than the quantum of oil reserves in Kuwait. This has ignited Pakistani dreams of oil wealth.

However, even though the amount of oil in Pakistan would be greater than Kuwait, the population of Pakistan is also far greater than Kuwait. Kuwait has a population of less than 10 million whereas Pakistan’s population is close to 193 million. Therefore on a per capita basis, the citizens of Pakistan would continue to remain poor despite the discovery of oil.

Corruption and Extremism

The oil reserves have been discovered near the Pakistan-Iran border, off the coast of Balochistan. The problem is that Balochistan is already trying to separate from Pakistan. Balochistan alleges that Pakistan has already been exploiting its vast natural reserves. According to Baloch separatists, Pakistan’s economic schemes are a giant transfer of wealth from the Baloch people to the Punjabi people. The discovery of oil and its subsequent utilization by Pakistan’s Punjabi people will only reaffirm their viewpoint.

It is therefore likely that Pakistan’s oil discovery may end up creating more extremism in the region. Also, Pakistan’s bureaucrats are famous for corruption. It is likely that the discovery of oil will create some very wealthy oligarchs. Given Pakistan’s economic history, it is likely that the oil wealth will be siphoned off by the influential people instead of being distributed amongst the general population.

Integration with CPEC

The discovery of oil in Pakistan will strengthen its relationship with China. China has proved to be Pakistan’s all weather friend. Also, China is the largest user of energy in the world. Up until now, China has been dependent upon oil supplies from countries where the United States has a huge influence. With Pakistan’s oil discovery this may change. The Chinese have already invested billions of dollars into building the China Pakistan Economic Corridor which terminates at Gwadar port, exactly where oil has been found. It will, therefore, be easy for China to build a pipeline which would allow it to import large quantities of oil from a country which it has control over.

Also, China would encourage Pakistan to trade oil in exchange for Yuan instead of the Dollar. This is because the currency in which oil is traded becomes the de-facto reserve country of the world. China wants to replace the Dollar with the Yuan and end American hegemony. It will try to strategically use Pakistan’s oil reserves in order to do that. Also since Pakistan owes a lot of money to China, it will have to accept Yuan in return for oil sales.

Reduced Import Bill and Increased Exports

At the present moment, Pakistan is facing a massive foreign exchange crisis. The country does not have money to pay its import bills. Hence, it is extremely important that the country cuts its import bills. Oil and natural gas constitute the largest imports of Pakistan. Hence, if the country is able to get rid of the oil and gas imports, it will end up sharply cutting its import bill. This will be a major boost to the precarious situation that the country is in. Also, if the import bill is reduced, the situation of the Pakistani Rupee relative to the American dollar will also improve.

The inflow of Foreign Investment

Even if Pakistan does discover huge quantities of oil and natural gas, it still will not have the technology required to refine oil. Pakistan would still be dependent upon Chinese companies and the western world to help set up refineries and build the entire ecosystem which surrounds oil and gas companies.

At the present moment, Pakistan has already signed a Memorandum of Understanding with ExxonMobil which guarantees $10 billion in investments in case of an oil discovery. If the states quantities of oil and gas are found, many companies will line up to set up refining plants. However, oil companies are known to be predatory in nature and have a record of destroying local communities. Hence, whether these investments will be beneficial for Pakistan is yet to be seen.

The discovery of oil in Pakistan will definitely come as a breather to this cash strapped nation. However, Pakistan will have to be very careful. In the past, many poor countries have descended into chaos and anarchy after the discovery of oil. Pakistan must take the necessary steps in order to avoid this fate.

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