OIL: Striking a Century!

oil.jpgThe price of crude oil on NYMEX (New York Mercantile Exchange) was under $25 a barrel in September 2003. By October 2007, the prices had reached $92 a barrel, further increasing to $99.29 a barrel on November 21, 2007. However, the final blow came on January 2, 2008 when the oil prices reached an all-time peak of $100 a barrel.

The energy crunch, the increasing imbalance between demand and supply and other geopolitical hostilities have contributed to this hike. The lag in harnessing energy from other renewable sources has also led to this disequilibrium between consumption and production.

The increasing demand for energy by the booming economies of China and India has put a massive strain on the oil reserves. To make things worse, the supply of oil is continuously decreasing. Venezuela’s oil production has declined because of government disputes with foreign oil companies and workers from its national oil company. Moreover, the deadly attack by insurgents on Tuesday, at a hotel in Port Harcourt, Nigeria which is the hub of the oil rich Niger-Delta region provided a spur to the prices. These insurgents have sabotaged pipelines in the delta region and have halted the production of oil. Meanwhile, the war in Iraq has decreased the export of oil to the rest of the world. Turkish attacks on Kurdish rebels in northern Iraq have also led to a setback in the supply of oil. Oil ports in Mexico have been closed because of bad weather and several other oil fields have dried up. The cold winter requirement of oil has further accentuated the demand for oil and led to increase in prices.

The report which states that OPEC may not be able to meet its share of global oil demand by 2024 together with speculators using oil prices as a hedge against the weakening dollar have driven up the prices of oil.

This increase in oil prices is likely to first affect the developing and underdeveloped countries having lesser income levels. India, which belongs to the category of developing countries, imports almost three-quarters of its energy needs. To make matters worse, even though crude oil prices have risen 79 percent from a year ago, the government has been unwilling to raise oil prices in line with global prices. Domestic prices continue to remain at $58 a barrel, remarkably below the international prices. The government is regulating oil prices to control the inflation rates and to protect the poor people who constitute a whopping 1.1 billion of the Indian population. This regulation mechanism has led to huge losses for the oil companies and enormous pressure on the exchequer.

The rise in oil prices is likely to have a huge impact on the transportation industry. The presently booming automobile sector in India is probably going to face some retardation in growth, particularly in its sales segment. The rising prices will cause a disincentive effect on the customers, as owning an automobile is likely to create a hole in their pockets. Although Tata is ready for the launch of its People’s car priced at Rs1 Lakh , the rise in oil prices is not likely to play to its advantage. It is ironic that in a world where innovation, science and technology are increasingly trying to make new things affordable for people, at the same time, the same science and technology is depleting the earth’s resources leading to an opposite effect, depriving the people from attaining the same.

The Airline industry is another one which is likely to face serious problems due to this price hike. The concept of low cost airlines which has been gathering pace for quite some time now is also likely to suffer a slowdown as the airlines will have to keep raising fares or reduce capacity to compensate for rising fuel charges which will defeat the entire purpose.

Thus, to meet the growing energy needs, India must encourage market mechanisms which will bring about efficiency and will encourage investments. Also, the private sector investment needs to complement the public sector investment. Initiatives should be taken to increase efficiency and enhance capacity in energy transport infrastructure for optimal utilization. However, the biggest challenge will be to replace coal (which currently represents 51% of the energy basket) and oil (for which India is heavily dependent on international supply) with natural gas, hydro and other renewable resources. Domestic production also needs to be expanded.

In the end, it is hard to say where the oil prices are headed in the future. This will depend upon the development of alternative fuels: solar, wind and biofuel. The future lies in realizing the importance of “GREEN”.

Sukanya Garg