The Price of Progress: Understanding the Impact of Oil Shocks on Pakistan's Economic Trajectory

Abstract

This paper assesses the impact of oil price fluctuation on Pakistan's economic growth with particular reference to the period 1990-2021. As one of the largest oil-importing countries, Pakistan is exposed to volatility in the world oil prices, which impacts many industries ranging from manufacturing to transportation and energy. To analyze the short-run and long-run effects of oil price fluctuation on significantly important macroeconomic factors, such as GDP, inflation rate, and expenditure on the household, this research employs an econometric approach, the Auto-Regressive Distributed Lag (ARDL) model. The study shows that the rise in oil costs has a near-perfect negative relationship with economic growth; higher oil prices lead to increased inflation rates and reduced efficiency. Thus, the paper evaluates the case of energy efficiency and source diversification to help mitigate the impact of oil price fluctuations and stresses that promoting energy efficiency and energy source diversification can encourage economic growth when oil prices fluctuate. They are called on to put measures in place to boost energy diversity and standby measures to protect the economy against volatile oil prices. These results are of tremendous value in determining Pakistan's energy policy and macroeconomic direction to sustain macroeconomic stability despite the challenges posed by fluctuating oil prices.