Pakistan’s lack of oil hedging exposes PSX to global price shocks

KARACHI (TKP Report): Pakistan’s vulnerability to international oil price fluctuations has renewed calls for a comprehensive energy procurement and hedging strategy, as escalating US-Iran tensions and fears of supply disruptions in the Middle East continue to unsettle financial markets and weaken investor confidence.

Pakistan Stock Exchange (PSX) former Director Amin Yousuf has said that the government should adopt long-term oil procurement contracts, futures arrangements and strategic petroleum reserves to protect the economy from sudden increases in international crude prices.

Speaking to The Karachi Post, Yousuf said Pakistan’s domestic economic indicators and corporate fundamentals remained encouraging, with listed companies reporting significantly improved earnings compared to the previous year. However, escalating oil prices have emerged as the biggest challenge for the economy and the stock market.

“The only thing that is affecting the stock market and the entire economy is the escalating oil prices,” he said.

His remarks come as active investor participation at the Pakistan Stock Exchange has reportedly fallen below 100,000, representing less than 15 percent of the total investor base, amid geopolitical uncertainty, rising international oil prices and concerns over the global economic outlook.

Amin Yousuf said the government needed to move beyond responding to international oil price increases after they had already occurred and instead develop a forward-looking procurement mechanism to reduce exposure to global market volatility.

Explaining the importance of advance purchasing arrangements, he said Pakistan should consider entering into futures or long-term contracts with oil-producing countries at predetermined prices, particularly when international crude rates were relatively lower.

“For example, if oil was around $70 per barrel and it was rising to $80, the government should have made future contracts with oil exporting countries or kept strategic stocks to avoid price shocks,” he said.

According to Yousuf, such arrangements could provide greater price certainty and help the country manage its import bill during periods of heightened geopolitical tensions.

He stressed that long-term procurement agreements could reduce uncertainty surrounding energy costs, allowing the government and businesses to plan their expenditures more effectively.

Pakistan remains heavily dependent on imported petroleum products and other energy resources, making its economy particularly vulnerable to fluctuations in international crude prices. Any sustained increase in oil prices can raise the country’s import bill, put pressure on foreign exchange reserves and complicate efforts to maintain external account stability.

Higher energy import costs can also feed into domestic inflation through increased transportation, electricity generation and industrial production expenses. For listed companies, particularly those operating in energy-intensive sectors, rising input costs can squeeze profit margins and weaken investor sentiment.

Yousuf also highlighted the importance of maintaining strategic petroleum reserves, arguing that adequate stocks could provide a temporary cushion against disruptions in international supplies and sudden price increases.

Market participants say better corporate earnings, improving foreign exchange reserves, and currency stability have provided support to the equity market. However, uncertainty surrounding oil prices and geopolitical developments has increasingly overshadowed these positive factors.

Yousuf further recommended tax exemptions and incentives for solarization to reduce Pakistan’s dependence on imported energy resources.

He said accelerating the adoption of solar power could help industries and other electricity consumers reduce their reliance on expensive imported fuels, including furnace oil and LNG used in power generation.

Tax relief on solar equipment, he argued, could encourage businesses to shift towards renewable energy, reduce production costs and improve industrial competitiveness.

He also called for a stronger import substitution policy, saying Pakistan needed to expand domestic production of goods currently being imported at considerable foreign exchange costs.

“Import substitution is essential to avoid trade deficit and boost exports. We need to produce locally what we are importing at high cost, especially when oil prices are rising,” he said.

Economic analysts believe that reducing dependence on imported energy and strengthening domestic production could help Pakistan improve its external account position and become more resilient to international commodity price shocks.

However, implementing such a strategy would require consistent government policies, investment in renewable energy infrastructure, improved storage capacity and effective coordination between energy procurement authorities and economic policymakers.

For the stock market, the challenge extends beyond immediate fluctuations in crude prices. Persistent uncertainty over energy costs can affect corporate investment decisions, industrial expansion and the earnings outlook of listed companies.

Yousuf’s proposals underline the need for Pakistan to treat energy procurement as a long-term economic security issue rather than merely a routine import requirement.

With geopolitical tensions continuing to threaten global energy markets, the country’s ability to secure supplies at predictable prices could become an important factor in controlling inflation, protecting foreign exchange reserves and restoring investor confidence at the Pakistan Stock Exchange.