Oil despair

Oil is a major source of energy driving the world . When it's available at low prices, the outlook for growth is optimistic. It's prices have jumped from $10 a barrel in 1998 toover $70 recently. This stark increase in prices cann't be attributed to a single factor. The death of the King Fahd of Saudi Arabia on August 3 lit a conflagration in world crude oil prices, which crossed $60 a barrel. In August, 2005 hurricane Katerina crippled the supply of oil to the USA from off-shore rigs in Gulf of Maxico. High oil prices have also resulted in high levels of unemployment and ever increasing budget deficit problems. We all know that price hike in oil inturn increase prices of all goods and thus mounting pressure on consumers through inflation. Developing countries are facing financial turmoil wrought by higher oil imports. According to IEA data, India spent $15 billion (3% of GDP approx.) on oil imports in 2003. This is 16% higher than 2001 oil-bill. While the world on an average will looose .5% to 1% GDP for $10 per barrel increase in oil prices, Sub-Saharan Africa would loose 3%. This will keep economic prosperity of oil importing countries- especially the least developing countries at bay.

Most of the known and exploited oil reserves are in one part of the world, i.e. West Asia (or the Middle East). Besides this the other major petroleum exporting countries are Russia, Nigeria, Indonesia and Venezuela. These countries have experienced politically instable in the recent past and has led to the oil traders demanding a premium. The main reason, however, for the oil price hike is surge in global oil consumption. Most of this increase has come from superfluous consumption in China and the USA. Although China's oil demand grew by almost 16% last year, the consumption in the United States is the biggest factor for this growth in the global oil demand. The US, with just 5% of the world population and consuption of one quarter of the global produce, is a major reason for the northward movement of oil prices. Speculation by some oil experts, who talk about oil prices touching a high of $100, is no less a reason for recent spurt. It is becoming to them who have invested in oil business, and these are the people who create unnecessary speculation. Fund investors (Like pention funds, provident funds)have also made a beeline and have poured in a lot of money into securitised investments in oil. The fact that OPEC has reiterated time and again that it will not allow prices to fall has helped these speculators.

There are umpteen reasons why oil traders feel that oil supplies might be reduced. One of the most important is growing turbulence in the Middle East. The war in Iraq, Iran's nuclear program, and internal instability in Saudi Arabia could all lead to a dramatic fall in the supply of oil (thanks to Mr. Bush and party). The situation outside the Middle East is not festal, the strikes and political problems in Venezuela and potential instability in West Africa are a cause of concern.