Challenge of soaring oil prices

Tukoji R. PANDIT

Early in January this year the world was shaken when crude oil touched $100 a barrel. The frightening prospect of oil prices hitting $200 a barrel looms large. That dreadful day was not expected before 2010. But when oil prices crossed US$ 135 a barrel in May it began to look as though the $200 a barrel ceiling will be hit much earlier-perhaps before the year ends.

The galloping pace of oil prices is a cause for much worry in a country like India which imports more than 70 per cent of its need. A rise in petroleum product prices was inevitable. Frankly, it is not easy to define the acceptable petroleum price cap from both the political and economic points of view.

Pressure

The pressure from the Left and the approaching Lok Sabha polls may rule out a hefty increase for the moment. Any how, a freeze on oil prices looks out of the question. Even in Taiwan, where a long-term freeze on oil prices was announced some months back, is now set to end on June 1.

The decision to hike oil prices will push up prices of goods and services across the country. Let there be no doubt. Well it means more inflation. A common refrain heard in the West that the accelerated fuel demand from countries like India and China is a major reason for the global price flare up. That, of course, is true to an extent. A host of other factors are equally responsible. And India cannot be blamed for any of those problems.

It will perhaps sound incredible to many that when Benazir Bhutto was murdered in Rawalpindi late in December last year it was quoted by some oil market experts as one of the factors that pushed up oil prices! In other words, geo-political uncertainties influence crude oil market. These experts were also critical of missile and rocket tests by North Korea for the same reason.

Oil analysts

One could, however, say that the oil analysts tend to exaggerate their geopolitical fears. For instance, when even President George W. Bush of the US has begun to sound unsure of attacking Iran, some oil experts are not ruling it out, if only to reinforce their argument about lack of normality in the oil-rich region.

Much of oil-rich Iraq may be in turmoil but its northern part, the Kurd region, has been known to be comparatively quiet and safe. Oil exports from northern Iraq suffered after Turkish forces invaded the region from where Kurdish insurgents operate. It had an impact on global oil supplies-and, hence, oil prices went up.

Trouble in West Asia, the region with most oil reserves in the world, is nothing new. If the Americans are to be believed the situation in the region has seen some improvement. But that certainly does not reflect on the price line.

A look at the price graph shows that in a matter of 12 months, prices have nearly doubled, though the situation in West Asia and other oil-producing regions did not really deteriorate to the extent that the hike would suggest. Outside West Asia, about the only major oil-producing nation that has been in some trouble is Nigeria where rebels often attack the oil facilities.

Speculation, then, is the culprit, like in the stock market. Well, that is nothing new and no one has been able to do anything about it. Because market forces are always driven by sentiment. Yet, the 400 per cent jump in prices since 2001 cannot be attributed to speculation. Certainly, for the current spurt. A more likely reason therefore could be something gap between demand and supply.

Unwilling

But the scene is a bit confusing. The oil producers’ cartel, OPEC, has been under pressure to ask its members to raise their oil output. It is unwilling to do nothing of the sort as it is producing enough to meet the demand. And OPEC attributes price appreciation to the ‘crazy’ market. Traders are exploiting the worries arising out of unstable conditions in many oil-producing nations, it avers.

Everyone in the oil chain—the producer, the trader and the governments—has been busy passing the buck. Fingers cannot be pointed at anyone in particular, particularly when it is more or less certain that the era of cheap fuel is over. Any large-scale prospecting looks out of the question. And the world has yet to move towards cleaner sources of energy.

Admittedly, petrol prices cannot be allowed to head north at breakneck speed. Perhaps, OPEC could be persuaded to step up production, provided, of course, there is adequate refining capacity to use the additional inputs of crude oil.

If the refining capacity is limited, as it is made out in several quarters, the oil cartel should invest in refining and pipeline capacities since it has been milked the world enough from the 1970s. No wonder there is a talk of rice producers forming a cartel of their own - something that will hit most of the OPEC members.

The world is well aware of the impact of the extraordinary rise in oil prices on most economies. The weakening dollar has made matters worse.

Inflation is hitting more and more nations. The escalation in fuel prices has also coincided with an equally worrisome phenomenon of rising costs of food, which has seen riots in many countries.

Indonesia has just increased the price of fuel by 30 per cent. Expectedly, it led to a lot of resentment. Indonesia is not a major oil-producing nation but till recently it was thought that its oil output, even if modest, would insulate it from the after effects of oil prices.

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