Oil as spoiler

Rising oil prices since the Iraq War, now compounded by the six-week-old decision of the Organisation of Oil Exporting Countries OPEC to cut back oil production, are beginning to take their toll on geopolitics and national economies. In spite of strong US pressures, Saudi Arabia had gone ahead with production cuts in a year when global demand of oil was expected to increase by 2 per cent during this year. This seems to have been driven as much by economic motives as the desire to quietly pay back Washington with an Arab diplomatic strategy of indirect approach to deal with the high levels of US pressure that the kingdom has been under since 9/11.

America8217;s relations with the Gulf countries have deteriorated since the war last year. America8217;s military-political reverses in Iraq during the past six weeks, not to talk of the ethical, moral and psychological shock of the maltreatment of Iraqi prisoners, coinciding as they have done with the oil production cutback, is only likely to widen the rift, with Gulf countries likely to be less accommodating in terms of oil production and prices. International oil prices now have gone above 40 a barrel, the highest figure in more than 13 years. And it is likely to stay that way with all its implications for the US economy in a presidential election year.

Warning bells for us were ringing for some weeks, and the domestic price of oil and petroleum products would have to cater for the international oil prices. The rise in oil prices caught the NDA government in the middle of its election campaign and it no doubt found it expedient to delay any policy response. This poses an additional dilemma for the incoming government in the immediate context. More important, volatility of oil prices brings home the criticality of our energy security in relation to rising imports of costlier oil from the world8217;s main oil reservoir, which involves nations that are currently facing serious sources of instability. We must diversify our sources of supply as well as the types of energy required to fuel our economic growth. For instance, we could take a cue from French and Japanese policy after the 1974 oil shock, and expand our nuclear electricity capacity substantively.