Contents

I. Introduction..........................................................................................................2
A. Objective of Research.......................................................................................2
B. Plan of the Project.............................................................................................3
1. Statement of Problem....................................................................................3
2. Data Collection..............................................................................................3
3. Data Management and Analysis....................................................................3
4. Presentation of Results..................................................................................4
II. Energy trends in Pakistan....................................................................................4
A. Oil.....................................................................................................................4
B. Natural Gas.......................................................................................................5
C. Liquefied Natural Gas (LNG)..............................................................................5
D. Coal...................................................................................................................5
E. Electricity..........................................................................................................6
1. Hydroelectricity..............................................................................................6
2. Conventional Thermal....................................................................................7
3. Other Renewables..........................................................................................7
4. Nuclear..........................................................................................................8
III. Literature Review..............................................................................................8
A. Energy as a Factor of Production......................................................................8
B. Causality between Energy and Economic Growth.............................................9
IV. Methodology...................................................................................................11
V. Results...............................................................................................................12
VI. Recommendations..........................................................................................13
VII. References......................................................................................................15
References

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I. Introduction
Energy is a fundamental aspect of human existence, it is the principal means for
providing access to basic needs such as food and water and it facilitates various
opportunities for the achievement of a decent quality of life. Access to affordable,
adequate, and appropriate energy services is therefore a prerequisite for sustainable
development, and for achieving the Millennium Development Goals adopted by the
governments of the world, including the goal of reducing poverty and hunger. Perhaps
the most critical challenge related to energy for sustainable development is how to
increase access to affordable, modern energy services, while also ensuring that the energy
services provided do not cause further adverse environmental and socio-economic
impacts.

A. Objective of Research
Recent rise in energy prices, shrinking existing resources, and the search for
alternative sources of energy and energy conservation technologies have brought
into focus the issue of causality between energy use and economic growth.
Energy expansion is expected to lead to higher growth and its shortage may retard
the growth process. Similarly economic growth may affect the demand for energy
significantly. The purpose of our research is to establish:

“The role of energy in an economy as a factor of production and whether an

economy’s growth is dependent upon energy or the use of energy is dependent
upon the economic growth.”

The motivation behind this project was based on the fact that, increased use of
better energy sources saves time, helps people in improving the quality of life and
environment. It improves the social services delivery, like effective utilization of
modern health related equipment and better facilities in educational institutions
and others. The availability of modern and better fuels improves the lives of the
females and children who spend time on collection of traditional fuel like wood.
Therefore, it can be claimed that energy sector and the energy services have
important implications for poverty reduction. For example, in the small scale

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 industry, mostly concentrated in rural areas, electricity provision can increase the
length of working day and increase the productivity of the resources. Furthermore,
energy sector itself is an important source of employment generation. Thus, use of
energy as an input is expected to have direct positive impact on output and indirect
positive impact on poverty and quality of life through the employment generation.
Understanding the basic properties of an economy with energy as a factor of
production is vital to fathom the sustainable development of an economy. The
economy now consists of streams of energy conversions that direct energy to the
production of goods and services. The focus on energy generates a variety of
insights. It yields a new taxonomy of economies and economic activities; allows a
better grasp of the tasks performed by labor and capital; raises the prospect of
examining growth as the speeding up of machines; and identifies greater use of
energy as an important source of growth.

B. Plan of the Project

1. Statement of Problem
“To determine whether an economy’s growth is dependent upon energy or
the use/consumption of energy is dependent upon the economic growth.”

2. Data Collection
The information required for our research includes details about current
and past policies of the government of Pakistan. It also encompasses
details about other variables affecting energy and sustainable development
such as environment. For this, we aim to collect secondary data, through
websites, economic surveys and the journals. However, if required, we can
also use primary data in the forms of interviews and surveys.

3. Data Management and Analysis

Analysis of data would be done by carefully studying the collected data
and applying theories to it.

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 4. Presentation of Results
A brief explanation of the format of the results will be presented in the
following forms, e.g.

• Pie charts

• Line graphs

• Tables

I. Energy trends in Pakistan

In recent years, the combination of rising oil consumption and flat oil production in
Pakistan has led to rising oil imports from Middle East exporters. In addition, the lack of
refining capacity leaves Pakistan heavily dependent on petroleum product imports.
Natural gas accounts for the largest share of Pakistan’s energy use, amounting to about
50 percent of total energy consumption. Pakistan currently consumes all of its domestic
natural gas production, but without higher production Pakistan will need to become a
natural gas importer. As a result, Pakistan is exploring several pipeline and liquefied
natural gas (LNG) import options to meet the expected growth in natural gas demand.
Pakistan’s electricity demand is rising rapidly. According to Pakistani government
estimates, generating capacity needs to grow by 50 percent by 2010 in order to meet
expected demand.

A. Oil
According to Oil and Gas Journal (OGJ), Pakistan had proven oil reserves of 300
million barrels as of January 2006. The majority of produced oil comes from
proven reserves located in the southern half of the country, with the three largest
oil-producing fields located in the Southern Indus Basin. Additional producing
fields are located in the Middle and Upper Indus Basins. Since the late 1980s,
Pakistan has not experienced many new oil fields coming online. As a result, oil
production has remained fairly flat, at around 60,000 barrels per day (bbl/d).
During the first eleven months of 2006, Pakistan produced an average of 58,000
bbl/d of crude oil. However, Pakistan has ambitious plans to increase its current
output to 100,000 bbl/d by 2010. Due to Pakistan’s modest oil production, the

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 country is dependent on oil imports to satisfy domestic oil demand. As of
November 2006, Pakistan had consumed approximately 350 thousand barrels of
oil and various petroleum products, of which more than 80 percent was imported.
The majority of oil imports come from the Middle East, with Saudi Arabia as the
lead importer.

B. Natural Gas
According to OGJ, Pakistan had 28 trillion cubic feet (Tcf) of proven natural gas
reserves in 2006. The bulk of these reserves are located in the southern half of
Pakistan. In 2004, Pakistan produced and consumed 968 billion cubic feet (Bcf).
In light of the current onshore exploration activities and resource outlook, the
Pakistani government expects minor increases in natural gas production in the
short-term. However, natural gas production is expected to decline over the next
15-25 year period, while natural gas demand is expected to increase. The
Pakistani government is currently developing plans to import additional natural
gas (see "Proposed Pipelines" below) in order to satisfy increasing demand.
According to the Pakistan Energy Yearbook, natural gas is currently the country’s
largest energy source, making up 50 percent of Pakistan’s energy mix in FY
2004/2005.

C. Liquefied Natural Gas (LNG)

In addition to natural gas import pipelines, Pakistan is pursuing liquefied natural
gas (LNG) import options to meet energy needs. In October 2006, United Arab
Emirates-based Dana Gas and its partners, Single Buoy Moorings and the
Granada Group signed a MoU to build an LNG import facility, with 3.5 million
tons per year capacity. The facility would be completed in 2010 and would be
located at Port Qasim, near Karachi.

D. Coal
Coal currently plays a minor role in Pakistan’s energy mix, although the country
contains an estimated 3,362 million short tons (Mmst) of proven recoverable
reserves. Pakistan produces small amounts of coal, 3.5 Mmst in 2004, and imports

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 additional coal, 1.7 Mmst in 2004, to satisfy demand. Recently, the discovery of
low-ash, low-sulfur lignite coal reserves in the Tharparkar (Thar) Desert in Sindh
province, estimated at 1,929 Mmst, has increased both domestic and foreign
development interest. China, which began developing various electric power
plants in tandem with the coal mines in 1994 in Pakistan, has shown the most
interest in the Thar region. However, several factors have hindered development
of the Thar coal reserves, including the depth and moisture level of the lignite
reserves, a scarcity of fresh water, and lack of road and power infrastructure.

E. Electricity
Pakistan had 20.4 gigawatts (GW) of installed electric generating capacity in
2004. Conventional thermal plants using oil, natural gas, and coal account for
about 66 percent of Pakistan’s capacity, with hydroelectricity making up 32
percent and nuclear 2 percent. The Pakistani government estimates that by 2010,
Pakistan will have to increase its generating capacity by more than 50 percent to
meet increasing demand. In 2004, Pakistan generated 80.2 billion kilowatt-hours
(Bkwh) of electricity while consuming 74.6 Bkwh. Pakistan's total power
generating capacity has increased rapidly in recent years, due largely to foreign
investment, leading to a partial alleviation of the power shortages Pakistan often
faces in peak seasons. However, much of Pakistan’s rural areas do not have
access to electric power and about half the population is not connected to the
national grid. Rotating blackouts ("load shedding") are also necessary in some
areas. In addition, transmission losses are about 30 percent, due to poor quality
infrastructure and a significant amount of power theft.

1. Hydroelectricity
Hydroelectric power represents a third of Pakistan’s power source,
however, periodic droughts affect the availability of hydropower
production. WAPDA controls the country’s major hydroelectric plants,
with the largest being the Tabela plant at 3,046 megawatts (MW) installed
capacity. The Tabela plant was the largest hydroelectric plant in Asia until

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 China began building the Three Gorges project, which will have 18,000
MW of installed capacity. Additional hydroelectric plants in operation
include Mangla (1,000 MW), Warsak (240 MW), and Chashma (184
MW). Although Pakistan has plans to develop additional hydroelectric
generating capacity, infrastructure constraints, such as access roads in
mountainous regions and resettlement costs of affected populations have
stalled progress. Nevertheless, Eden Enterprises is going ahead with its
Suki Kinari (655 MW) hydropower project. Eden Enterprises, along with
Pakistani partners own 95 percent of S.K. Hydro, which was given a 35-50
year concession period for the power plant. Construction is expected to
begin in 2009, with the plant coming online in 2011. The Private Power
and Infrastructure Board (PPIB) is currently reviewing six additional
hydropower projects for the Swat River. If approved, the projects would
provide several hundred MW of additional hydroelectric power capacity to
the country.

2. Conventional Thermal
WAPDA operates the majority of thermal power plants in Pakistan, with
over 5,000 MW of installed capacity in its control. The Guddu plant is the
largest plant operated by WAPDA, with a capacity of 1,650 MW. In
recent years, growth in Pakistan’s thermal power generation has come
primarily from new independent power producers (IPPs), some of which
have been funded by foreign investors. The two largest IPPs in Pakistan
are Kot Addu (1,600 MW) and Hubb River (1,300 MW), both of which
supply power to WAPDA. The Kot Addu plant was privatized in 1996
(from WAPDA). International Power holds a 36 percent equity stake in
the Kot Addu plant. The Pakistani government has recognized that the
majority of thermal plants in the country are run on fuel oil and produce
considerable amounts of pollution. In an effort to reduce pollution, the
government would like to see fuel oil-power plants converted to natural
gas in the future.

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 3. Other Renewables
Pakistan is working to expand the use of renewable energy to help bridge
the gap of energy deficiency in the country. In 2003, the Pakistani
government created the Alternative Energy Development Board (AEDB).
AEDB’s primary objective is to help Pakistan achieve a 10 percent
renewable energy share in the country’s energy mix. AEDB is working to
create an environment in Pakistan that is conducive to investment from the
private sector in renewable energy. In July 2006, Turkish-based Zorlu
Energji Grubu signed a letter of intent to install a 50-MW wind farm.
Zorlu would operate the wind farm for 20 years once the project is
completed in 2008. Zorlu has indicated that it would like to install an
additional 2,000 MW of renewable energy capacity in Pakistan by 2015.

4. Nuclear
Pakistan has one nuclear power plant, Chashma-1, with 300 MW of
installed capacity. The Pakistan Atomic Energy Commission operates the
nuclear plant. Pakistan is currently working on second nuclear power plant
(Chashma-2), with the help of China National Nuclear Corporation. The
plant will have 325 MW of installed capacity and could be completed by
2009.

II. Literature Review

This chapter overviews the importance of energy in the sustainable development of an
economy and how vital energy is for an economy to reach a sustainable level of
development. It will help us to build links between different factors of production and
energy and also the causality between energy and sustainable development.

A. Energy as a Factor of Production

The neoclassical construct of the economy is built on three factors of production:
capital, labor and technology. Production in each period begins with given
amounts of capital, labor and technology, and terminates in the production of

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 goods. Capital has its origins in prior periods: it is simply a portion of the
economy’s output carried forward from previous periods. The neoclassical
economists are generally reticent about how labor is produced or reproduced; they
assume that it grows exogenously. Technology is described as the stock of
knowledge available to an economy. Knowledge may be embodied in machines,
human skills, or it may take the form of social codes and arrangements. Missing
from this account of the economy is the primary force that drives all economic
activities: energy. Sure enough, energy enters the neoclassical economy as the
effort of labor, but this source of energy has been declining progressively over the
past two centuries. Energy from non-human sources – coal, oil, electricity, food
or fertilizer – enters the economy only as an intermediate input; it is incorporated
into a country’s national income accounts as value-added in the energy sector.
Quite simply, energy is not a factor of production. In other words, neoclassical
economics is built upon a disjunction between the economy and ecology. The
neoclassical economy exists in splendid isolation from nature and its well-springs
of energy.
Among economists, Nicholas Georgescu-Roegen (1972, 1976) was one of the
first to comment on the absence of energy in economic theory. He pointed out that
Marxists and neoclassical economists abstract from nature; they take resources
and energy flows for granted and ignore the economy’s output of wastes.
Standard economics, Georgescu-Roegen (1976: 30) argued, does not recognize
that “terrestrial resources of energy and materials are irrevocably used up and the
harmful effects of pollution on the environment accumulate.” The economists’
optimism about the endless possibilities of growth is based on this truncated
worldview that excludes nature from its calculus.2 Following the lead of
Georgescu-Roegen and others, the new field of ecological economics has
explored the different ways in which entropy imposes limits on growth.

B. Causality between Energy and Economic Growth

In empirical literature, however, there is no consensus about the direction of
causality. For example, Asafu-Adjaye (2000) examines the causal relationship

9
between energy consumption, energy prices, and economic growth for selected
developing countries. The study finds evidence of uni-directional Granger
causality running from energy to income for India and Indonesia, in the short run,
and bi-directional Granger causality between energy and income for The
Philippines and Thailand. The evidence for Pakistan also reveals that electricity
consumption affects economic growth significantly, and there is bi-directional
causality between economic growth and consumption of petroleum products and
no causal relationship between natural gas consumption and economic growth
[see Aqeel and Butt (2001)]. At the sectoral level, the evidence shows that energy
use affects the growth of manufacturing sector of Pakistan, however, the
substitution possibilities are limited among energy and non-energy inputs and
between electricity and gas for the period 1972–93 [see Mahmud (2000)]. Energy
demand, particularly for households, responds positively and significantly to
economic growth [see Siddiqui (1999)]. The demand is responsive to changes in
energy prices also. Own price effect is negative and the cross price elasticity
estimates indicate substitution between electricity and petroleum products and
between natural gas and petroleum products, especially for domestic users. The
results for commodity producing sectors like industry and agriculture, reported in
Siddiqui (1999), are supported by the findings of Mahmud (2000) that there is
limited substitutability between different sources of energy. Thus, the rise in
prices of energy has important implications for energy use in Pakistan.
Rehana Siddiqui in her paper (Energy and Economic Growth in Pakistan-2004)
examined the issue of causality between economic growth and energy use for
Pakistan, for the period 1971–2003. The study differs from earlier studies in three
dimensions. First, earlier studies, like Aqeel and Butt (2001), examine the issue of
causality for Pakistan but ignore the impact of changes in other sources of
economic growth. We intend to analyze the role of energy in economic growth
while controlling for changes in primary factors of production and other sources
of growth, viz., labor, capital, human capital formation and exports. Second,
earlier studies examine the impact of total energy use on economic growth. The

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 households are important users of energy, however, this use may not contribute to
economic growth. Therefore, in this study, we exclude the household
consumption of energy and examine the impact of commercial use of energy on
economic growth. Third, unlike earlier studies, the present study constructs
capital stock series to examine the impact of capital formation on economic
growth.

III. Methodology
The methodology for this research included data collection and its review and then the
formulation of results based on the analysis of the collected data. The information required
for our research included details about current and past policies of government of Pakistan. It also
encompasses details about other variables that affect the linkage between energy and sustainable
development. For this project, we collected secondary data, through websites, economic surveys
and the journals. The analysis of the data was carried out by applying theories to it. To find a
solution to our problem statement we had formulated to hypothesis, which are as follows:

Hypothesis 1: “Energy is a factor of production and an increase in energy supply will lead to an
increase in economic output”
Hypothesis 2: “An increase in energy supply will directly cause an increase in economic output
if the consumption is directed towards growth in the output of an economy”

To find out whether our hypothesis were correct or not we applied correlation between the
consumption of the three fuels (Energy Sources) that power Pakistan’s economy during the past
eight years and the GDP growth rates of the corresponding years. The results were as follows:

Table 1: ELECTRICITY CONSUMPTION

GDP growth
Year rate Electricity supply (kilowatt-hours)
2003 4.50% 62,270,000,000
2004 5.50% 62,270,000,000
2005 6.10% 52,660,000,000

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2006 6.60% 71,540,000,000
2007 6.60% 74,620,000,000
2008 5.30% 68,400,000,000
2009 2.70% 68,400,000,000
2010 2.70% 72,200,000,000

Correlation= -0.3333

Table: 2 “OIL CONSUMPTION”

GDP growth
Year rate Oil supply (bbl/day)
2003 4.50% 365,000
2004 5.50% 365,000
2005 6.10% 365,000
2006 6.60% 365,000
2007 6.60% 324,000
2008 5.30% 345,000
2009 2.70% 345,000
2010 2.70% 383,000
Correlation= -0.3333

Table:3 “NATURAL GAS CONSUMPTION”

GDP growth
Year rate Natural gas - supply (cubic meters)
2004 5.50% 23,400,000,000
2005 6.10% 23,400,000,000
2006 6.60% 23,800,000,000
2007 6.60% 27,400,000,000
2008 5.30% 30,800,000,000
2009 2.70% 30,800,000,000
2010 2.70% 37,500,000,000

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 Correlation= -0.7961

IV. Results
Our findings revealed that in Pakistan’s case an increase in the GDP output was not as a
direct result of an increase in the supply of energy hence the negative correlation between
the supply of the three sources of energy and the GDP growth. However, we believe that
the increase in the consumption was due to an increase in the household consumption of
the three sources of energy. If we look at the GDP and energy consumption pattern from
2008 onwards we find out that as the domestic consumption reached its peak and
constrained the supply the GDP output did eventually come down substantially. Hence,
we have deduced that as the household consumption of the three energy sources grew
Pakistan did substantially move up the ranks in terms of HDI (Human Development
Index) and currently ranks at 141 amongst the countries of the world. If the household
consumption would have remained constant over the years and the energy supply would
have been directed to agriculture and industry the GDP growth rate would not have come
down, hence proving our hypothesis number 2. But now because of constrained energy
sources due to surge in the household consumption Pakistan’s economic growth has
slowed down.

V. Recommendations
The absence of energy in the neoclassical production function distorts the standard
analyses of growth and sources of growth. The neoclassical economist fails to recognize
that in many cases, growth simply amounts to a speeding up of activities; if these
activities use machines, it amounts to a speeding up of machines. This establishes a direct
link between energy and growth: since speed often depends upon the use of energy. What
this means is that growth in supplies of energy is an indispensable source of economic
growth.
The issue of energy supply and demand is important not only for the economic prosperity
of the current generations but also for the future generations. From the above analysis, we

13
can see that energy is a critical determinant of economic growth. Therefore, its shortage
can retard economic growth. However, in order to achieve high economic growth rates,
multidimensional policies are required and these policies should not ignore the energy
sector. In order to improve availability of energy and balance of payment position,
alternative sources of energy should also be developed. Based on the discussion above,
we can outline following policy implications and areas for future research:
• The rise in supply of energy at affordable prices is important for economic
growth. Deregulation will have important implication for pricing behavior of the
various sources of energy. The rise in prices affects the demand and consequently
the economic growth. Thus, the pricing policies should take into account the
impact on economic growth also.
• The issue of renewable and non renewable sources of energy, demand and supply
of each component of energy, intensity and efficiency of energy use, availability
of substitutes, pricing mechanism and balance of payment implications of energy
use are important and the issue should be examined in detail. To the extent that
energy also contributes to self sufficiency and the ability to build other industry
and social programming, such improvement may also catalyze continued growth
and development in nations with reasonably good, responsible governance. It can
be the building block for sustained development. The energy mix choices and
planning for the future energy plan will be essential in the aid of making a
sustained development. This shift can be hastened by wise policy incentives and
an increase in research and development funding for renewable energy so that
renewable sources can meet the world’s energy and environmental needs in the
twenty first century.
• In the recent decade the issues of energy conservation, its pricing and the impact
on environment have raised concerns in the developed and developing countries.
In Pakistan, crisis of energy can be termed not only the supply issue but also the
“Crisis of Energy Pricing”. The crises is not a result of only the mismatch in
demand and supply of energy, but an outcome of imbalance in government
policies. Since a significant proportion of energy is imported particularly the

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 petroleum and petroleum products, a sharp increase in price of energy also
indicate deterioration in the purchasing power of our export earnings in Pakistan.
For example, in 1971-72, 1 metric ton of raw cotton export could buy 64 metric
tons of crude oil in 1984-85, but in 2009, it could buy only 7.79 MT of crude oil.
This increase in prices affects not only the economic growth but also the balance
of payments.

I. References

http://www.economics.neu.edu/papers/documents/06-003.pdf

http://en.wikipedia.org/wiki/Sustainable_development

http://ideas.repec.org/a/pid/journl/v43y2004i2p175-200.html

http://ideas.repec.org/a/pid/journl/v43y2004i2p175-200.html

http://earthtrends.wri.org/text/energy-resources/country-profile-140.html

http://twas.ictp.it/news/making-the-move-to-sustainable-energy

http://www.stwr.org/economic-sharing-alternatives/from-a-failed-growth-economy-
to-a-steady-state-economy.html

http://ivythesis.typepad.com/term_paper_topics/2009/11/global-trends-in-energy-
security-the-case-of-pakistan.html

http://earthtrends.wri.org/pdf_library/country_profiles/ene_cou_586.pdf

Energy and Economic Growth in Pakistan (REHANA SIDDIQUI*The Pakistan Development

Review 43 : 2 (Summer 2004) pp. 175–200)

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