Abstract

Oil refineries in Pakistan operate below their optimal refining capacity, increasing reliance on costly imports of refined petroleum products, widening the trade deficit, depleting foreign exchange reserves, and limiting domestic value addition. Understanding the economic and operational drivers of capacity utilization (CU) is critical for enhancing efficiency and competitiveness. Despite policy interest, empirical research on the macroeconomic determinants and structural barriers to optimal CU in Pakistan’s refining sector remains scarce. This study adopts a mixed-methods approach. A Panel Autoregressive Distributed Lag (ARDL) model is applied to annual data from 1996 to 2023 to evaluate the relationships between macroeconomic variables and CU. Results indicate that crude oil prices and exchange rates have a significant negative long-run effect on CU, suggesting that rising input costs and currency pressures reduce operational efficiency. Conversely, GDP growth and refined product imports are positively associated with CU, reflecting increased domestic activity and demand. Scenario-based analysis shows hydroskimming refineries yield limited benefits, even at higher utilization levels, while transitioning to deep conversion technology with moderate expansion in capacity can generate substantial import substitution and export surpluses. To achieve this, the study recommends targeted fiscal incentives for refinery upgradation, such as tax holidays and duty-free equipment imports to enhance investment returns, and exchange rate risk- mitigation measures for crude procurement. Establishing a unified National Refining Policy with clear timelines for refinery upgradation plans is critical to reduce import dependence, stabilize   foreign   exchange   reserves,   and   ensure   sustainable   growth   in   Pakistan’s refining sector.