Mahnur Asim

Every fortnight, a notification is issued announcing a Rs. 30-per-litre hike in petrol prices. Then, just days later, another notification arrives, slashing prices by Rs. 15. These fluctuations occur with little clarity, leaving the general public confused and struggling to manage their budgets. So what's really driving this volatility, and why does it keep putting Pakistani’s in such a dilemma/fuel loops?

About 70% of the world's crude oil reserves belong to just a few nations: Saudi Arabia, Iran, Iraq, Venezuela, Russia, and the UAE. These countries coordinate through OPEC, founded in September 1960 in Baghdad by five countries: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Over the decades, more countries have joined it, and today OPEC has 12 member countries. The primary purpose of OPEC (Organisation of the Petroleum Exporting Countries) is to coordinate and unify the petroleum policies of its member countries. It acts to stabilize global oil markets, ensuring fair prices for producers and a steady supply of petroleum to consuming countries. Less supply means higher prices, and more supply means lower prices. In 2024, OPEC alone accounted for 30% of global oil production, with Saudi Arabia as the largest contributor, producing 9-11 million barrels per day. Then there's OPEC+, a larger group that includes non-members like Russia. Together, OPEC+ controls about 42% of all crude oil produced worldwide and over 50% of oil that gets traded internationally, making it the single most powerful group affecting oil prices on Earth.

In the early 1970s, the petrodollar system was established. Under this system, the US struck a deal with Saudi Arabia whereby oil would be priced exclusively in US dollars in return for American military guarantees. As a result, every oil-importing country was compelled to hold dollar reserves, which imparted a sustained bullish pull toward the US dollar, helping make it a stronger and more stable currency. This one deal, in a nutshell, explains how oil prices affect the dollar and ultimately how many rupees you need to buy a dollar.

How is the price actually decided in Pakistan?

The initial cost comes from the international price of refined petrol (not crude oil) from the Arab Gulf market, plus shipping, insurance, and customs charges from the Gulf to Pakistan, converted at the prevailing dollar-to-rupee exchange rate. After that, government taxes- mainly the Petroleum Development Levy (PDL) with General Sales Tax currently kept near zero on petrol to avoid pushing prices even higher, make up about 28% of the final price. Beyond the levy, local costs like the Inland Freight Equalization Margin (which exists to keep petrol prices the same whether someone is buying it in Karachi or Balochistan), along with dealer and company margins. The PDL alone is expected to bring in approximately PKR 1.27 trillion for the government in FY 2025–26, which is one reason these taxes rarely come down even when global oil prices fall. The government depends heavily on this revenue, and because OGRA updates its formula every 15 days, any spike or drop in global prices reaches consumers almost directly, with no buffer in between.

Pakistan uses about 440,000 to 480,000 barrels of petroleum (crude oil) a day but only produces approximately 64,500 to 90,000 barrels locally, which means nearly 80% of total oil and 70% of petrol (refined oil) have to be imported, all paid for in US dollars. This sets off a direct chain reaction: when global oil prices rise because OPEC+ cuts supply or a conflict disrupts shipping routes, Pakistan must pay more dollars for the same amount of oil. That extra-dollar demand ultimately pushes the rupee's value down, and a weaker rupee then makes the next shipment even more expensive than the last, causing petrol prices to rise again and repeating the same loop. This is why even a small incident in the international arena shows up as a noticeable domestic price jump within days. 

Pakistan's inflation hit 30.77% in 2023, with rising fuel costs pushing up transport, food, and manufacturing prices across the entire economy. The transport sector consumes the vast majority of petroleum products, leaving the country's logistical and mobility systems entirely at the mercy of global oil markets. 

In 2026, Pakistan experienced its steepest spike in petrol prices yet, triggered by the closure of the Strait of Hormuz amid the US-Israel-Iran conflict, which overnight choked off a significant share of global oil supply. Petrol prices shot up by 61 to 64 % within a few months, reaching approximately Rs 458 per litre and plunging the country into economic turmoil. A larger oil import bill also widened Pakistan's trade deficit, increased dollar demand, and further weakened the rupee, feeding the same cycle. Industries paid more simply to operate, while the government was left balancing two conflicting goals: shielding consumers from price hikes while still collecting enough fuel tax revenue to meet IMF and budget targets. 

In simple terms, petrol prices in Pakistan are never really decided inside Pakistan. They are shaped first by a handful of oil-producing countries, by the strength of the US dollar, then by the value of the rupee, and only finalized locally through taxes and a fixed pricing formula. Until the country reduces its dependence on imported oil, this same loop will keep repeating, and people will keep wondering and suffering again.

 Disclaimer: The views expressed in this article are solely those of the author and do not necessarily reflect the official stance of The Himalayan Research Institute Pakistan (THRIP)

_________________________________ 

Mahnur Asim is a research intern at the Himalayan Research Institute and a student of International Relations at Government College University, Lahore, Pakistan.