How the Exchange Rate Affects Fuel Prices in Pakistan

When people discuss fuel prices in Pakistan, they usually talk about the price of oil in the world market. There is a second number that matters just as much, which is the value of the rupee against the US dollar. Understanding how the two combine explains many price changes that otherwise seem puzzling.

Why the dollar matters

International oil and petroleum products are traded in US dollars. Pakistan imports a large part of its fuel, so the country must pay in dollars. Importers and oil companies buy dollars with rupees, and the more rupees a dollar costs, the more every barrel costs in local currency.

The same cargo of fuel can therefore cost more in rupees without any change in the dollar price, just because the rupee has weakened.

A worked example

The numbers below are simplified to show the principle. Suppose a litre of petrol costs the equivalent of 0.70 US dollars on the international market.

• At a rate of 250 rupees per dollar, the product cost is 0.70 x 250 = Rs 175 per litre.
• If the rupee weakens to 280 per dollar, the same product costs 0.70 x 280 = Rs 196 per litre, an increase of Rs 21 although the dollar price has not changed.

Now suppose oil gets cheaper at the same time and the dollar price falls by 10 per cent, to 0.63 dollars. At 280 rupees per dollar the product cost is 0.63 x 280 = Rs 176.40. That is almost the same as the original Rs 175, so the cheaper oil has been cancelled by the weaker rupee. This is one reason a headline about falling oil prices does not always translate into a cheaper litre.

Why the rupee can move

Many things influence the exchange rate: the balance between imports and exports, the amount of foreign currency available, interest rates, inflation, foreign loans and investor confidence. Fuel itself is one of the largest import items, so a rise in oil prices can also put pressure on the rupee, which then makes the next cargo more expensive. It is a loop that can make price moves larger than expected.

It is not only petrol

The rate affects almost everything that is imported, directly or through its ingredients. A higher fuel price raises transport costs, and transport costs raise the price of food and goods. A weaker rupee therefore affects the household budget in two ways at the same time, through imported goods and through the fuel used to move all goods.

How the price formula uses the rate

The formula for the pump price takes the international product price and converts it into rupees using a recent exchange rate. The conversion uses recent averages, so a sharp change in the rate takes a little while to appear in the price, just as with the oil price itself. For this reason the effects often appear in the next notification and not in the same week as the change. See our article on why petrol prices fall more slowly than oil prices for the effect of averaging.

What this means for you

You cannot control the exchange rate, but there are practical steps for a household or a small business:

• Know your usage. Work out how many litres you use each month with our monthly fuel cost method. A rupee change in the price then has a clear cost.
• Keep a fuel log. Records make it easy to see a real change in spending, as we explain in our guide to keeping a fuel expense log.
• Reduce waste. Efficiency is the only part of the equation fully in your hands. Better tyre pressure, smoother driving and regular servicing all lower the litres you need. See our guides on fuel-efficient driving for cars and motorcycle mileage.

How to read the next announcement

When the price changes, ask three questions. Did oil move in dollars? Did the rupee move against the dollar? Did the government change the levy? A price that rose although oil fell usually has one of the other two answers behind it. The price table on our home page shows the latest figures and the size of the most recent change.

Common questions

Why does the price sometimes rise on the same day the rupee strengthens? The formula uses averages over a recent period, so a move in either direction takes time to appear. A price announced today reflects the past weeks, not the last day.

Does a stronger rupee always make fuel cheaper? It lowers the rupee cost of imported product, other things being equal. But the government may change the levy at the same time, or oil prices may rise, and these can hide the effect.

Can I protect myself against it? Not directly. What you can do is reduce the litres you need and keep a clear idea of your monthly use, so that a price change never surprises you.

A longer view

Over several years the rupee has lost a large part of its value against the dollar. When that happens, even steady dollar prices for oil mean steadily higher rupee prices for fuel. Looking only at the dollar price of oil gives an incomplete picture. When you read an analysis of a price change, check whether it accounts for the exchange rate as well.

The exchange rate is one of the most important and least visible parts of the pump price. Once you understand it, a confusing headline becomes easier to read. To see how it fits with taxes, freight and margins, read our guide to fuel prices in Pakistan.