A sharp rise in global oil prices following escalating tensions in the Middle East is threatening to disrupt Pakistan’s fragile economic recovery, with risks to the current account, inflation, and foreign exchange reserves.
For Pakistan, which imports about 85 percent of its crude oil, even a $10 increase in global oil prices could widen its current account deficit by $1.5 billion to $2 billion. If prices approach $100 per barrel, the annualized deficit impact could expand to between $5 billion and $7 billion, potentially reversing recent external account improvements that helped the country post a $2 billion surplus in FY25.
Domestic crude production stands at roughly 80,000 barrels per day, meeting less than 20 percent of national demand. Higher oil prices typically add 0.5 to 0.6 percentage points to inflation for every $10 increase, posing renewed risks after inflation eased from above 30 percent in 2023 to around 5.8 percent recently.
Rising fuel costs also lead to higher electricity bills through fuel price adjustments, as a large share of power generation depends on oil and regasified liquefied natural gas.
The impact extends to food and transport costs, given Pakistan’s reliance on road-based freight rather than an integrated rail network. Diesel price increases quickly translate into higher prices for vegetables, grains, and other essentials. At the same time, the government often raises the Petroleum Development Levy alongside fuel price hikes to meet revenue targets, compounding the burden on consumers.
Energy imports remain a major vulnerability. Pakistan imports 29 percent of its natural gas, 50 percent of its LPG, and 20 percent of its coal. The energy import bill reached $17.5 billion in 2023 and is projected to rise substantially by 2030 if trends continue.
Pakistan is also estimated to hold significant shale reserves, including more than 9 billion barrels of shale oil and 105 trillion cubic feet of shale gas. However, developing offshore and shale potential will require substantial capital.
Exploration alone could cost more than $5 billion, while an estimated $25 billion to $30 billion may be needed over the next decade to extract just 10 percent of the country’s 235 trillion cubic feet of natural gas reserves and reduce reliance on imports.
