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Abstract

The aim of this paper is to understand the effects of the rising Price of Oil, and itsconsequences for the Developing world. Escalating prices of this preciouscommodity has led to devastating effects across the globe, but the severity of itsconsequences is most prevalent in the emerging markets arena. The longest growthspurt in the history of Pakistan has paved the way for the severest recession thenation has ever experienced. High oil prices, political turmoil, and high levels of inflation are all leading to an era of economic uncertainty. The Macroeconomiceffects of the Rising oil prices have affected the nation with great intensity. Thelasting solution to the problem of imported oil for Pakistan is rapid development of alternative energy. Pakistan is already a pioneer in the use of Natural Gas as aprimary source of energy, and further development will only lead the nation towardsenergy independence.

Key Words; Oil Prices, Inflation, Consumption, Trade Deficit, Economic Growth,CNG.

Outline

1. Introduction1.1

The Global reaction to rising Oil Prices

1.2

Oil Prices hit the Emerging Markets

1.3

Introduction to the Economy of Pakistan

2. Review of Literature & Empirical Analysis2.1

High Oil Prices and Economic Growth

2.1.a. Macroeconomic Issues2.1.b. Monetary Policy for an Inflationary environment.

2.2

The Dynamics of the Current Economic problems of Pakistan

2.3

Oil Prices and Inflation & Oil prices and Trade Deficit-Introduction to theMacroeconomic Model

3. Data Modeling & Empirical Analysis3.1

Oil Prices and Inflation & Oil prices and Trade Deficit

3.2

Oil prices and substitution with Natural Gas.

4. Empirical Results4.1

Price of Oil and National Income Accounting

4.1.a Rising Value of Imports4.1.b Rising Inflation

4.2

Real Affect of Rising Oil Prices on Pakistan

.4.3

Natural Gas as a Solution

4.3.a The CNG Sector 4.3.b The Independent Power Producers (IPP

)

4.4

The disadvantage of substituting Fossil Fuels

4.5

Price of Oil and the Demand for Natural Gas, introduction to the model.

4.6

Price of Oil and the Demand for Natural Gas, model tested.

5. Conclusion6. Bibliography

1. Introduction

1.1 The Global reaction to rising Oil Prices

After hitting fresh records almost every day prior to July/18/2008, the price of oil hasfallen, but not enough to ease the growing global epidemic of inflation that high oilprices have brought. The world today is more dependent on oil as a source of energy than it ever was before. This is not the first time global economic leaders arefacing the issue of higher energy prices, and rising rates of inflation, but it is stillcreating a wave of uncertainty, which has negatively impacted all major financialmarkets of the world. The health of the financial markets is a good predictor of where the economy is headed. Today most bourses around the world have showndouble digit declines in market capitalization. Economic Leaders in both, thedeveloped world, and the emerging markets are cracking their heads trying tofigure out how to ease the pain their citizens are facing due to the rising prices of energy. Higher energy costs are leading to inflation, as all goods and servicesrequire some measure of energy to product, store, and distribute. Higher energyprices are also lessening the discretionary incomes of consumers as they need tospend more on energy leaving less available to spend on other goods and services,therefore negatively impacting consumer spending. As consumers spend less onconsumption they decrease the aggregate level of consumption in an economy,which impacts total Gross Domestic Product (GDP) negatively.What is causing this rapid increase in the prices of crude oil? There are manytheories out there trying to explain this phenomenon. One major term is the rapidincrease in demand from the rising “BRIC” (Brazil, Russia, India, and China) nations.Rapid Industrialization, and economic growth has prompted the BRIC economies torequire a substantial increase in the amount of oil used for energy. The other theoryout there is that the depreciating dollar is making it cheaper for BRIC’s, and othernations, to buy more and more oil, because crude is quoted in dollars, and adepreciating dollar is leading an increase in the buying power from domesticcurrencies. We also hear that increased speculation in the derivatives markets, hastransformed this conventional hedging marketplace into a gambling arena, wherespeculators use margin accounts to buy futures contracts of crude oil hoping tomake a profit and sell before contract maturity. The speculators can manipulate oilprices by buying or selling many contracts simultaneously creating greater marketvolatility. It cannot be certain which one of these variables is most effectivelychanging the price of crude oil each day, but for now the consequences of this runup from $27 per barrel in 2003, to over $140 per barrel in 2008, has a very souroutlook for the global economy.