Opinion - Editorials   

Behind the oil price spike

With crude oil on the international market touching $126 a barrel, it is clear that the rise in price has little to do with underlying trends on either the supply or demand side. To put the latest price spurt in perspective, it is worth recalling that the Indian basket of crude oil — which tends to be a little cheaper than the Brent sweet crude benchmark — averaged $23 a barrel in March 2002. But that was before the U.S. invasion of Iraq and before the speculat ors at the New York Mercantile Exchange and International Petroleum Exchange in London got into the act. By 2004, the price had doubled and by 2007 doubled again. None of these sharp movements in price can be correlated to supply bottlenecks, seasonal spurts in demand, or even the secular growth in oil consumption in the developing world. Nevertheless, the myth persists that rising demand in India and China is the major reason for rising prices. In November 2007, when the international price was $98 a barrel, the International Energy Agency warned that “high economic growth in China and India could push oil prices to $159 a barrel by 2030,” an annual rate of approximately $3 a barrel. Now oil analysts blithely speak of the $150 barrel being round the corner. Indian and Chinese oil imports are rising sharply but the year-on-year increase in global oil demand in 2007-2008 is just 1.5 per cent. What is happening in the international market, therefore, is something far more complex.

Broadly speaking, there are two long-term and two short-term factors driving the oil market. Over the long-term, increases in demand and the gradual decline of ‘easy oil’ supply mean prices will rise slowly. But today’s markets are being driven entirely by short-term factors. And the two most important ones are speculation and the declining value of the dollar. As the greenback loses value in relation to other currencies, the price of all dollar-denominated commodities will rise as suppliers seek to maintain their purchasing power. Speculation may be a rather more complex phenomenon but one thing is certain. The greater the uncertainty, the greater the likelihood of speculative activity on the oil market. With tension between the United States and Iran showing no signs of abating, fear about future supply bottlenecks is certainly one factor driving prices upwards. There is also concern about renewed tension between the U.S and Venezuela, at the government level and also because of the lawsuit Exxon-Mobil has filed against Petróleos de Venezuela (PdVsa), which has led to the freezing of the latter’s assets worldwide up to a value of $12 billion. For the Manmohan Singh government, the challenge is to put into action innovative fiscal measures that can insulate hundreds of millions of India’s poor and hard-pressed consumers from the impact of rising global oil prices.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Behind the oil price spike
Tragic callousness
For a new deal to the rural poor
A disaster and the politics of ‘democracy’
The country of the future finally arrives
Minister’s appeal
Ramar Sethu issue
Wall of shame
Chimera of universal acceptance

Copyright © 2008, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu