It was a cold night that day, after chatting for more than two hours at Barista(a Coffee Place) I and my friend separated bidding farewell to each other. On my return trip to home, the fuel in my bike went to into reserve fuel, So I just headed for a near by Fuel station. To my dismay, the Fuel station seemed to have only premium petrol. Out of no choice, I filled premium petrol on that day went to home. But the incident spurred me into thinking why there is a shortage of petrol and the oil prices being so high.To start of off, oil was pretty cheap compared to the prices it is selling now. In 1998 price of oil was around 35$ a barrel ( A barrel is roughly equal to 159 litres). Today world's most profitable company is Exxon Mobil, an US oil major with yearly turn over of 40billion dollars, thanks 140$ a barrel , oil price.
Lets take trip along the history lane for oil prices, Middle east which supplies the vast majority of the oil today was a barren waste land until 1908, when oil was discovered there first. From that point onwards oil dominated the regions source of income. Infact Saudi Arabia, the worlds largest exporter of oil earns 70% of the country's revenue by selling a single commodity i.e oil. Its the same for the most countries in the middle east. Now reasons for the oil prices soaring high is due to a combination of factors.
- Over the years, the demand for oil is gone up dramatically not only due to the consumption by developed countries in the west, but also because of the Asian tiger economies like Korea, China and India.Today the amount of oil produced in world per day is 85 million barrels ,call it coincidence or irony , the amount of oil world consumes is also 85 million barrels.
- Given the supply being equal to demand,even the slightest disruption or a rumour of a disruption of oil supplies is enough to push the worlds oil prices easily buy a few dollars. Every now and then a strike by workers in Nigeria or Sudan, a hurricane in Caribbean where offshore oil fields are located pushes up the oil prices. Add to this Middle east which produces most of the oil is certainly not peace haven, as it was before the Iraq war.
- Now for of the most important body which controls worlds oil, Organization of Petroleum Exporting Countries (OPEC) which makes up for most of the world's oil producers . Traditionally OPEC as kept worlds oil prices at manageable levels, but it has not shied away from using oil price as an economic weapon in the past to get want it wants. During the Arab-Israeli war ,OPEC aborted production of oil to stop the west from supporting Israel in the war. In period of 6 months oil prices went up 400%, which led to the west relenting its support to the war. So we can come to the conclusion OPEC is not always consumer friendly.
- One might ask why cant OPEC raise production, to produce more oil. Well the answer to the question is YES, the OPEC as spare capacity to increase output of oil. But Simply it doesnt want to because the countries that make up OPEC are themself a divided house. At the recent meet of worlds Oil producers and consumers at jeddah. Saudi Arabia and Oman (staunch US allies) wanted to increase the production, but Iran and Venezula (On US hit list) opposed the move, they are of the opnion there is enough oil in market for everybody.
- Now what about, other members in OPEC they havent so far felt the pinch of shortage of fuel that we are fueling here. In a country like Nigeria, a litre of petrol is cheaper than a litre of water, its even better in Venezula where you can buy petrol for 2 cents a litre (thats like paises in india). To sum it up, they dont want the prices to come down any time soon, as long as they are not paying the oil bill. It is pretty evident from the OPEC chief statement of wanting oil price to cross 170$ a barrel.
- Another point I want to stress here is that, oil is a non renewable resource, hence Oil producers feel they have more to gain from keeping the oil in the ground and letting the prices go up, rather than pumping out more oil and exhausting their major source of income.
- Now for the most important factor in this Oil price surge, the US. Thanks to George W Bush war on Iraq , it is the 12th in the producer's list in OPEC, though it has the third largest oil reserves in the world leaving lot of under utilised capacity mainly due to the poor oil producing infrastructure again due to the war.
- The US is worlds largest oil producer, infact it has pumped out more oil than the Saudis have pumped out since they discovered oil in their country. But the irony is US is also one of the worlds largest importers of oil. All the oil the US produces is consumed by itself, despite being a major producer. That just shows the size of the US economy.
- When US economy sneezes, the world economy catches cold. The sub prime mortgage crisis is pulling US economy into recession leaving a weak US dollar. Why is this important, because all the Oil producing countries expect consumers to pay in dollars when you buy oil. A weak dollar means we need to pay more for the same barrel of oil, then what we might have done a year ago. Of course OPEC could receive the payment in Euro, which is a strong currency, But US would not want to give up the position of its currency being the most dominant in the world of which oil market plays a crucial part.
- With the US economy down along with it the share markets, investors in west want a safe bet for investments where they can make profits. So where do they invest, the Oil Market. Speculation and Hedging i.e, investing an amount in oil , betting that oil prices go up beyond certain amount. Once it crosses that mark, you can draw your amount with profits, is also rampant which pushes the value of oil further.
Now what can we do in India, well there is little room for maneovure considering the fact India imports 70% of the oil. We have to feel the heat of the prices inspite of the fact Government here subdises Rs 30 for every litre of diesel, Rs 10 for every litre of petrol and Rs 300 for every LPG gas cylinder we buy. The only thing we can ask is for OPEC to increase production ( the signs of that happening seem very slim until the end of this year). Given the race of new oil fields is literally a rat race for countries, India doing right thing by pushing for India-Pakistan-Iran pipeline and also Nuclear deal at the same time to satisfy the country's energy need. There is a slight glimmer of hope for India in future, some 1.3 million square miles in India lies unexplored for oil, the Deccan Trap. It could be well be India's own backyard Oil well . But what separates the oil and the drilling machines is 2000m thick very hard basalt rock underneath the Deccan trap, where oil could be found. Neither Indian or Foreign Oil companies seem to have the technology to drill through basalt. So relief from oil prices is pretty much out of our hands at the moment. At least I have decided to do my slight bit to solve oil crisis in deciding not to take out my bike for places where I could reach by walk and to my weekly meetings with my friends. Of course driving 150 cc bike with a cooling glass to those meetings at Barista might attract the attention of people ( to be more precise Girls) , but again it might not make economic sense at the moment.
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