The 50 barrier

Crude oil prices have broken the barrier of 50 per barrel. This represents a nearly 75 per cent increase in the price of crude oil over a calendar year. What makes the situation critical is that the world8217;s supply buffer is a mere 800,000 barrels against the total daily global demand of 82 million barrels. Some of the major reasons for the jump in oil prices include the problems of oil supplies from Iraq where armed conflict, if anything, is threatening to escalate rather than die down. In Nigeria, another major oil producing nation, violence is seriously destabilising oil production and supplies. Russia8217;s domestic woes partly arising from the oil giant Yukos and its multi-billion tax arrears threaten to cut supplies.

It seems the weather gods have also intervened to reduce the output from Mexico after Hurricane Ivan forced the shutting down of offshore installations since September 13, leading to a substantive reduction in oil production. Hyped up threats of war by the US against Iran or air strikes by Israel against Iranian energy facilities hardly help to generate confidence in the stability of oil supplies and prices in the foreseeable future. Even if some of the problems noted above get resolved, the risks to oil supplies are unlikely to go away any time soon. We must, therefore, prepare for a prolonged period of oil price volatility besides the average level of prices staying high over the coming decades.

Every dollar rise in oil price is believed to cost the Indian economy Rs 3,000 crore. The US economy experiences a 03 per cent downturn with every 10 rise in oil price. The short-term answer for India is to manage the situation with adjustments in duty structures. But with a rapidly rising energy demand in the country, we need to seriously look again at our energy policies. For example, greater reliance on natural gas is an obvious method of reducing high levels of oil dependencies and potential vulnerabilities. This is what makes the overland gas pipelines through Pakistan so critical for the economic well being of both Pakistan and India. At the same time, we must pay greater attention to nuclear and other renewable forms of energy.