Is Oil Prices Volatility Taking Toll: Sectoral Analysis of Pakistan Stock Exchange

Abstract

Oil is a crucial non-renewable power resource for a country, indicating its financial stability. Oil prices' stability, directly and indirectly, impacts inflation, economic conditions, and trade stability. The present study examines the relationship between oil price volatility and firm profitability. It also studied the effect of the fluctuation of oil prices on different sectors. The scope of the study includes all the non-financial sectors of Pakistan. The data was extracted from the Financial Statement Analysis of the State Bank of Pakistan (SBP) from 2015 to 2020. The fourteen (14) sectors selected for this research include 292 firms. The ordinary least squares method (OLS) was used to evaluate the oil price volatility-profitability relationship. The results indicate that oil volatility negatively and weakly affects the firm's profitability. In addition, it negatively impacts firm profitability in the textile, motor vehicles, trailers and auto parts, coke and refined petroleum products, and electrical machinery and apparatus sectors. However, a significant positive relationship exists in industries like chemicals, chemical products, pharmaceuticals, mineral products, fuel, and energy sectors. Overall, it is also found that oil price fluctuations significantly impact different sectors. The study has important implications for bankers and managers. Firm managers must reduce the negative consequences of oil price volatility and reconsider forming early warnings to improve organizational performance.