Examining the diesel conundrum.

The year 2022 was difficult for oil-importing countries, including Pakistan, as commodity prices shot through the roof. The steep increase in the cost of refined products, such as diesel, placed a significant strain on their trade balances and left consumers feeling the pinch at the pump. With a volatile global market, government officials in Pakistan must take proactive measures to mitigate any potential crisis in the future.

Diesel is a kind of middle distillate, as opposed to lighter distillates such as gasoline and heavier distillates like furnace oil. These distillates, as the name implies, are produced when crude oil goes through the distillation process and other stages of treatment in an oil refinery. What sets the middle distillates apart is that they are mainly used in the commercial sector. They are consumed by freight transportation, agriculture, manufacturing, and other industries. Their demand, therefore, primarily comes from economic activities.

The demand for diesel skyrocketed in 2022 as the global economy rebounded from the pandemic. On top of this, supply-side issues, such as inadequate distillate production in two of the world's biggest producers of refined products - the US and China - as well as the Russia-Ukraine conflict, led to record-high refining margins for diesel. The refining margin is the difference between the price of a refined product and the cost of crude oil.

The refining margins on gasoil, which serves as the foundation for diesel, reached an unprecedented peak of more than $70 a barrel in Asian markets in mid-2022. While it has since fallen to the $30 to $35 a barrel range, it remains significantly higher than the single-digit levels it often traded in 2021 and 2020.

If domestic refineries operate at full capacity, which can fulfil all local diesel demand, the annual net forex savings could be close to $1bn

Pakistan has historically relied on international markets for around 40 per cent of its diesel supply. The country has five oil refineries that could theoretically meet all of its diesel demand. However, these refineries often operate below capacity due to longstanding industry issues that have yet to be addressed by policymakers. This leaves Pakistan with little choice but to import diesel, placing a strain on the country's foreign reserves.

In the last financial year that ended in June, Pakistan imported 5.39 million MT of high-speed diesel (HSD), mainly from Kuwait and the UAE, with a cost of...