Pakistan’s oil crisis is often framed as a question of global oil prices and subsidies, but in reality it is more consequential as a question of strategic foresight, structural fragility and state weakness. This results in internal inflation, external deficits, monetary depreciation and social tensions with almost zero absorption capacity.
Earlier this month, in a single adjustment cycle, petrol hit Rs 450 and diesel Rs 500 per liter, with headlines blaming the Middle East crisis, but in reality it is a predictable consequence of deferred investment, political fragmentation and institutional inertia.
Pakistan consumes around 500,000 barrels of oil per day while the country’s domestic production is between 70,000 and 80,000. We import 20% crude oil and 80% refined oil, and 80% of our supply depends on imports denominated in US dollars. And every time the rupee depreciates, even slightly, it directly translates into additional costs running into billions of dollars.
Previously, when crude prices exceeded $110 per barrel, the effect was predictable and compounded, and caused domestic prices to increase by 40-50% in a single cycle. While this is unprecedented, it is the end result of a system unable to absorb shocks, reflecting weak governance and underutilized infrastructure. Therefore, tax designs view energy as a revenue-generating instrument rather than a strategic asset.
Scale always builds resilience as India processes 5.5 million barrels per day across its 23 refineries, while China exceeds 12 million barrels per day across 30 facilities. The UK refines 1.1 million barrels per day despite falling domestic production. Pakistan operates five refineries with a combined capacity of 450,000 barrels, but only refines 60,000 barrels per day.
In 2007, the government announced an expansion plan to modernize these refineries and their storage capacity, but even after 15 years, this plan has still not been implemented. In newspapers and in meetings of official circles there is a lot of movement, but in reality progress is minimal. Our five refineries (Parco, Cnergyico, NRL, ARL and PRL) do not lack refining capacity but lack modern refining capacities, as four out of five refineries are very basic (hydroskimming) with low complexity. Thus, structural failure is compounded by investment delays. Additionally, these refineries are underutilized because their configurations do not match the national demand for gasoline and diesel.
This underutilization leads to 80-85% refined fuel being imported at a higher cost of $10-15 per barrel, further inflating the annual oil bill to $10-20 billion, with crude alone topping $5 billion in peak years. This operational and structural weakness is exacerbating macroeconomic tensions, thereby depleting foreign exchange reserves, worsening current account deficits and, unfortunately, as a result, circular debt now running into trillions of rupees. Subsidies briefly alleviate crises but delay inevitable corrections, concentrating shocks and worsening fiscal risk.
Then there is what is called the oil tax (PL), anchored in this dynamic and which has become a de facto tax collection instrument. For the government, it is easy to collect, bypasses provincial revenue sharing, and faces little resistance compared to taxing entrenched interests. Through this levy, the government collected 1.22 trillion rupees (about $4.7 billion) in the 2024-25 fiscal year. PL represents 35 to 40% of retail gasoline prices.
In the current financial year 2025-26, the government has already collected over Rs 1 trillion through oil tax and will surpass the target in this regard. This represents approximately more than 100 billion in tax revenue per month without any effort to document and structure the informal economy.
Ordinary citizens, especially workers and the lower middle class, face difficulties in their daily lives due to the double burden of the cost of energy and the real taxation inherent in transport, goods and services. Supervision gaps further corrode potential revenues, with oil marketing companies sometimes failing to remit full PL revenues, while subsidies exceeding Rs 100 billion provide only insignificant relief.
Pakistan must prioritize building modern, export-oriented oil refineries with high jet fuel production (100,000 b/d) to offset crude imports with dollar-generating exports.
As global fuel demand evolves, aviation fuel remains structurally resilient as there are no medium-term EV threats. Modern oil refineries need capital of $5-10 billion and will take 4-5 years to develop. Instead of relying on FDI, CPEC or Saudi support (as has been the case, this is ideal but has delayed the progress of this initiative for over two decades).
Under the SIFC, a sovereign financing model through provincial participation (an annual five percent share of their NFC price), 2% from strategic foreign exchange reserves and allocation of 20% of a portion of oil tax revenue can anchor this initiative and will be a considerable step towards our sustainability and self-sufficiency in fuel consumption and production. National strategic assets are always developed without relying on foreign funding or investment. Our nuclear program is a clear example.
This initiative will not only strengthen our foreign exchange reserves and safeguard our energy security, but also help us move from a consumption-driven policy to a long-term investment-driven national resilience strategy. Pakistan should have prioritized this initiative well before proliferating its domestic market through oil marketing companies.
These are low-barrier capital flow retail and marketing segments, producing visible growth while stagnating primary resilience – which has expanded consumer access but significantly limited production capacity and shock absorption.
In 2000, India created the Jamnagar refinery, with a capacity of 1,000,000 b/d. During the Ukrainian War, it benefited from cheap crude oil from Russia, refined at the Jamnagar refinery, and exported refined gasoline and jet fuel to Europe. This initiative as part of the economic reforms of the 1990s earned them significant levels of foreign exchange.
For Pakistan, the case for structural reform is financially compelling and viable. A new 200,000 barrel per day refinery, costing $5 billion, will reduce imports and generate $1.2 billion to $1.5 billion in annual savings, recouping the investment in six to seven years.
Even a 15% drop in world prices only extends the return on investment for eight or nine years; a 20% depreciation of the rupee takes the savings to $1.7 billion, shortening the payback period to five or six years. The sensitivity analysis confirms that investing in resilience is not a luxury but a fiscal and strategic responsibility.
The implications are far-reaching and go beyond energy, as I highlighted in my previous article on Pakistan’s railway reforms. Railways handle less than 5% of freight, more than 90% of which is by road. This dependence increases fuel consumption, import bills and economic inefficiency.
Even promising EV adoption policies remain largely symbolic. Without a billion-dollar investment in charging infrastructure, network modernization and tariff rationalization, electric vehicles in Pakistan cannot significantly reduce fuel demand.
A synchronized five-year investment program could produce returns of 12-15% through import substitution and foreign exchange savings, but without systemic alignment, these initiatives remain speculative.
Pakistan’s frequent oil crises experience similar recurrences: reactive and politically motivated energy policy intensifies instability. We are a firefighting nation, and tackling the symptoms like price adjustments, subsidies, and tax collection will never allow us to focus on the causes.
Decades of deferred investments, governance failures, bureaucratic fragmentation and electoral short-termism for political purposes have left our energy sector away from a platform for progress and development towards cyclical vulnerability.
To break out of this diurnal cycle, we need decisive leadership, we need to stabilize the Pakistani rupee, separate energy policy from political rhetoric, streamline regulatory approvals and fully commit to infrastructure expansion in the medium term. We can further harmonize institutional credibility through the SIFC platform, as well as policy continuity and strategic vision. These are prerequisites for launching or attracting investments in any sector.
Paying expensive gas for our vehicles is no accident. This is due to a structural inevitability facilitated and coordinated by a system that merges revenue extraction with energy provision. Developed and civilized countries absorb global energy shocks through their strong governance and infrastructure mechanism. Our system transfers them directly to citizens. Unless we reform and prioritize resilience over emergency aid, every international oil crisis would translate into domestic difficulties. Energy reforms are no longer optional but a test of leadership, as they are the only solution to energy sovereignty.
The writer is a political economist, public policy commentator and advocate of principled leadership and regional cooperation in the Muslim world.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the editorial policies of PK Press Club.tv.
Originally published in The News
