Fuelling Inflation

hulam Hussain has been running a petrol station on the outskirts of Karachi for eleven years. He remembers the day his phone kept ringing. Brokers, drivers, even a school teacher wanted to know if they should fill their fuel tanks before prices shot up again. That was back in March. Four months in, the situation hasn’t improved much.

Nearly five months into the US-Israel war on Iran, the tremors felt in the Gulf continue to travel quietly through Pakistan’s economy. These arrive not as headlines but as slightly higher grocery bills, slower deliveries and a fuel station owner doing the arithmetic in his head every morning before the operations commence.

Prof Dr Raza Ali Khan, an economist and teacher who has spent years tracking how external shocks ripple through Pakistan’s finances, says the country’s vulnerability was never really about the Gulf at all.

“Whenever tensions escalate in the Persian Gulf, Pakistan watches with understandable concern,” he says. “The reason is simple: while the conflict may take place far from our borders, its economic consequences can quickly reach every household in the country.”

It is a slow, almost invisible chain, he says.

Pakistan imports most of its petroleum. When war disrupts oil supplies or unsettles global markets, crude prices climb. That means more dollars are needed to buy the same tank of fuel; more pressure on foreign currency reserves that were never particularly comfortable to begin with; and, eventually, a weaker rupee.

“A higher oil import bill means Pakistan must spend more precious foreign exchange to purchase the same quantity of fuel,” Dr Khan adds. From there, he says, the damage spreads outward: costlier machinery, chemicals, pharmaceuticals and edible oil, because a weaker rupee makes everything Pakistan buys from abroad more expensive.

Energy sits underneath almost everything else, Dr Khan notes. It runs the tubewells that irrigate the fields; the trucks that carry vegetables to Karachi’s markets; the looms in Faisalabad’s textile mills. When fuel and electricity become dearer, those costs eventually turn up in a family’s grocery bag and monthly expense, regardless of whether the family has ever even heard of the Strait of Hormuz.

“The greatest burden of this inflation is borne by ordinary citizens,” he says. Families whose wages have not moved in years suddenly find that transport, electricity and food eat up a larger share of the household budget than before. It is not always that people are earning less. Often, he says, their money simply buys less than it once did.

Businesses feel the same squeeze.

Labour-intensive industries, textiles, transport, construction, cement and small manufacturers are among the most exposed, Dr Khan says, since higher fuel and power costs shrink margins and force firms to slow production and cut jobs.

Some economists suggest that a weaker rupee should make Pakistani exports more competitive. Dr Khan is not so sure. “If exporters are paying far more for electricity, gas and imported inputs, whatever advantage a cheaper currency offers tends to evaporate,” he argues.

There is another complication most consumers rarely ever consider: the cost of the ships that carry the world’s oil.

Roughly a quarter of the world’s seaborne crude passes through the Strait of Hormuz. The waterway has seen mined waters, seized vessels and attacks on tankers since the war began in February. Any disruption there raises shipping costs, insurance premiums and freight charges, all of which eventually show up in the price of imported goods on Pakistani shelves.

Dr Khan also points to Pakistan’s Gulf-based workforce, whose remittances have long propped up the country’s foreign exchange reserves. In the early stages of a conflict, he says, money sent home can actually hold steady or rise as workers send extra funds to reassure their families. “But a prolonged war that slows Gulf economies could eventually shrink job opportunities for those same workers, cutting off remittances just when Pakistan needs them the most.”

“The larger lesson is that Pakistan’s vulnerability does not originate in the Gulf; it lies within the structural weaknesses of its own economy,” he says, pointing to heavy reliance on imported fuel, thin export diversification and years of underinvestment in renewable energy.

“A conflict in the Persian Gulf may never cross Pakistan’s borders but its economic impact certainly will.”

For Zulfikar Thaver, the Union of Small and Medium Enterprises president, the theory has already become a set of instructions he is giving out to worried members. The war, which began on February 28 this year, briefly eased after an April ceasefire tied to reopening the Strait of Hormuz. However, the truce broke down in early July. The US has since carried out regular strikes on Iran and Iran has struck back at US allies across Bahrain, Kuwait, Qatar, Jordan, Oman and the UAE.

“There is no ceasefire in place now. This is an active, widening conflict with no clear end date,” Thaver says, adding that SME owners need to plan on the basis of this situation rather than wait for calm to return.

He says the Gulf shipping routes have become a genuine liability, not a temporary inconvenience. “The Strait of Hormuz has seen mined waters, seized vessels and attacks on tankers,” he says, warning members to expect continued freight delays, war-risk insurance surcharges and rerouting costs “as the base case, not a temporary blip.”

Fuel and crude prices, he says, will likely keep swinging with every escalation and de-escalation. “Businesses should budget accordingly rather than assume a return to pre-February levels.”

He also flags the exposure of Pakistan’s expatriate workforce, spread across the UAE, Kuwait, Qatar, Bahrain and Oman—all of whom have reported strikes or interceptions—as a risk to remittances and, by extension, to the rupee.

“We encourage members to look at alternative shipping routes and ports, and alternative suppliers and markets rather than assuming that the Gulf routes will normalise soon,” he says, adding that his advice to SMEs was built around managing prolonged uncertainty rather than betting on a quick resolution. “Nothing in the current trajectory suggests a quick end.”

Back at the petrol station, Ghulam Hussain has his own grievance—one shared widely across the retail fuel trade. The All Pakistan Petrol Pump Owners Association has opposed the government’s decision to fix petroleum prices on a daily basis, arguing that constant revisions are hurting the interests and business of station owners who must adjust stock, pricing and cash flow at short notice, often absorbing losses when prices move against them between supply and sale.

Members of the association say that the daily mechanism—introduced as global prices grow more volatile—has left many petrol station owners managing risks they did not sign up for, layered on top of a war they have no control over.

For Hussain, the arithmetic is simple. “Every morning I check the new price before I check my stock,” he says. “The war is far away. The price is not.”

The writer is a senior financial correspondent at The News. He holds Alfred Friendly, Daniel Pearl and Geo Journalism fellowships. He can be reached at shahid.jillani@gmail.com