Oil, Wars and the Test of Public Economy

In the global economic system, energy has always held the position of a backbone. Crude oil is not merely a commodity; it is one of the most powerful instruments shaping global politics, wars, peace, and economic influence. Whenever conflict erupts in the Middle East, its impact does not remain confined to the region. Instead, it spreads rapidly across the world, shaking financial markets and disrupting economic stability.

The recent escalation involving Iran, Israel, and the United States once again demonstrated how deeply global economic systems remain tied to oil prices.

Before this geopolitical tension, Brent crude oil was relatively stable in the international market, hovering around 68 to 70 dollars per barrel. Investors were calm, supply chains were functioning smoothly, and global energy markets were not under pressure. However, as soon as the conflict intensified, fears of disruption in the Strait of Hormuz, potential attacks on Iranian energy infrastructure, and the possibility of broader U.S. military involvement triggered panic in global markets. Within days, crude oil prices surged to approximately 78 to 82 dollars per barrel. Although this increase may appear modest in numerical terms, its impact on the global economy translated into billions of dollars in added cost.

During the height of the conflict, concerns of global inflation resurfaced. Countries heavily dependent on imported energy faced immediate economic anxiety. Pakistan is one such country where a significant portion of energy requirements is met through imported petroleum products. As global prices rose, discussions regarding domestic fuel price increases began almost immediately. Businesses grew cautious, transport operators anticipated higher costs, and ordinary citizens braced for another wave of inflation.

Before the outbreak of this conflict, petrol prices in Pakistan were approximately in the range of 252 to 256 rupees per litre. This period reflected relative global stability in crude oil markets and a comparatively stable local currency exchange rate. However, as international oil prices increased and import costs rose, domestic petrol prices in Pakistan also climbed, reaching around 258 to 265 rupees per litre. Diesel prices, in some instances, increased even more sharply, touching 260 to 270 rupees per litre.

This phase triggered widespread economic pressure on the public. Transportation fares increased, food prices rose, and industrial production costs escalated. However, the most important question emerged after the conflict de-escalated and global oil prices began to decline once again.

Following the ceasefire and reduction in geopolitical tensions, Brent crude oil prices returned to nearly 72 to 75 dollars per barrel, almost the same level seen before the conflict began. In some trading sessions, prices even dipped slightly below that range. Global energy markets stabilized, supply concerns eased, and several countries began adjusting fuel prices downward, though gradually.

At this stage, a crucial question arose in Pakistan: if global oil prices have returned to their pre-conflict levels, should domestic fuel prices not also reflect the same adjustment? To answer this question, it is necessary to understand that fuel pricing in Pakistan is not solely dependent on international crude oil rates.

In Pakistan, petrol prices are determined by multiple components. These include international crude oil prices, import costs, shipping and insurance charges, refinery margins, exchange rate fluctuations between the rupee and the US dollar, oil marketing company margins, dealer commissions, and most importantly, government taxes and petroleum levies. This complex structure explains why domestic prices do not always move in perfect synchronization with global oil price changes.

A proportional analysis provides a clearer picture. When crude oil was around 68 dollars per barrel, petrol prices in Pakistan were approximately 252 rupees per litre. When crude oil surged to around 80 dollars during the conflict, domestic petrol prices rose to about 265 rupees per litre. This reflects an approximate 15 to 18 percent increase in global oil prices, while domestic prices increased by roughly 5 to 7 percent during the same period. This indicates that not the entire global price shock was immediately transferred to consumers.

However, when global prices fell back to around 70 dollars per barrel after the conflict, domestic fuel prices did not fully reverse in the same proportion. This discrepancy is the core reason behind public concern and repeated debate. If price increases are partially and rapidly passed on to consumers, why is the reduction not equally swift or complete?

Based on proportional calculations, a fair estimation can be made. If 68 dollars corresponds to approximately 252 rupees per litre, then at 70 dollars, the fair price should be around 258 to 260 rupees per litre. Similarly, when prices peaked at 80 dollars, the corresponding domestic price aligned at around 265 rupees per litre. Following the same logic, once global prices return to near 70 dollars, domestic petrol prices should ideally return to approximately 250 to 255 rupees per litre.

However, the reality is slightly different. Domestic fuel prices in Pakistan often remain somewhat above this calculated fair range. The primary reason lies in fiscal policy considerations. Petroleum levies and taxes are increasingly used as significant revenue sources to manage budget deficits. When global oil prices decline, rather than fully transferring the benefit to consumers, a portion of the relief is absorbed by the fiscal system to stabilize government revenues.

This creates a persistent gap between economic theory and practical implementation. From a purely economic standpoint, consumers expect immediate relief when global prices fall. From a fiscal standpoint, governments must balance revenue needs, subsidy pressures, and external account constraints. This tension defines fuel pricing policy in Pakistan.

Another critical dimension is the broader impact on inflation. In economies like Pakistan, transportation and energy costs directly influence the prices of almost all goods and services. When fuel prices rise, inflation accelerates rapidly. Conversely, when fuel prices fall, the relief is often delayed in reaching the end consumer. This lag effect weakens the transmission of global economic benefits into domestic markets.

Globally, similar patterns have also been observed. After the recent geopolitical tensions, although crude oil prices declined significantly following the ceasefire, many countries did not immediately pass on the full benefit to consumers. The existence of long-term procurement contracts, inventory systems, and hedging strategies often delays the adjustment of retail fuel prices.
For Pakistan, the key lesson lies in improving transparency and consistency in fuel pricing mechanisms. If the public is clearly informed about the breakdown of fuel prices—including global crude rates, exchange rate impact, taxes, and levies—trust in the system can improve significantly. Without such transparency, every price revision becomes a source of public debate and skepticism.

The Iran–Israel–United States tension once again highlighted a fundamental reality: whether there is war or peace in the world, the economic burden ultimately falls on ordinary citizens. However, a responsible state must ensure that benefits arising from global stability are also transferred to the public with the same fairness and proportionality as the costs of instability.

In conclusion, purely on the basis of economic logic and proportional analysis, the fair price of petrol in Pakistan today should ideally be in the range of 250 to 255 rupees per litre, assuming global crude prices remain near 70 dollars per barrel. Any deviation above this range largely reflects domestic fiscal and taxation policies rather than international oil market conditions. This is the fundamental reality that continues to shape the relationship between global energy markets, national policy, and public economic experience.