Rising oil prices face global opposition

By Aftab Ahmad

The international oil prices have shattered all past records and have been hovering around $130 a barrel, for the last few weeks. While oil prices have already doubled during the last one year, Goldman Sache group inc predicted last month that oil prices could witness a ‘super-spike’, rising to $150-200 a barrel, within the next six months to two years.

The recent upsurge in oil prices has drawn world attention and the latest G-8 meeting – wrapped up in Japan a few days ago – had expressed its deep concern over the unchecked increase in the international oil prices, which (it thinks) constitutes a serious threat to the global economic growth and stability.

The G-8 aforesaid meeting had, therefore, asked OPEC to increase its oil supply and raise the oil refining capacity, in order to bring down the oil prices to a normal level. The role of speculation in the oil market, in the latest upsurge in the oil prices, was also discussed and it was decided to carry out a probe in the matter.

Earlier, the matter was taken up for discussion by both the political parties in the United States. As a result of a heated debate on the subject, there were demands for investigations into the oil price fixing mechanism, together with punitive action against the oil exporters.

According to reports appearing in the US Press, Congress members had discussed measures such as blocking arms deal with Saudi Arabia and asking Secretary General OPEC to make himself available for a briefing on the OPEC production policies. In the Senate, lawmakers considered pushing legislation to allow suing of OPEC members under the US anti-trust law. The Chief Executives of the giant oil companies in the US were, also, summoned and they were asked to explain why the gas consumers in the US were made to pay such a prohibitive price of gas, while their own profit had increased manifold. The CEO’s of the oil companies had replied that it was not in their power to change the world oil market.

In the aftermath of the above-mentioned developments and the global reaction to the soaring oil prices, Saudi Arabia – principal member of the OPEC – called a meeting of the oil exporters and oil consumers to discuss matters relating to the recent rise in prices. The meeting was held on June 22 in Saudi Arabia. After the meeting, Saudi Arabia decided to increase its daily oil production to 9.7 million barrels. However, other OPEC members such as Libya and Kuwait did not favour increasing production, since they thought that the current upsurge in oil prices had nothing to do with the supply of oil and that speculation was the main culprit behind the price rise.

While the world community (oil consumers in particular) has already voiced its concern over the soaring international oil prices, economic observers the world over had expressed the view that oil consumers themselves should also initiate measures such as conservation and demand management to bring down the demand for oil in their respective countries, in order to force the world oil market to come down from its higher level. China – the second largest oil consumer in the world after the US – increased its local oil price the other day and the international oil prices immediately declined (although marginally) , fearing that the demand for oil in China may come down as a result of upward revision of the local oil price. In Pakistan and India, also, the local oil prices have been revised upward recently, although the same is likely to hard-hit the poor in these countries, because the upward revision of the local oil prices must push up the overall inflation rate in due course of time.

Independent economists in the US had also expressed the view recently (as reported in the US Press) that lower gasoline prices in the US would encourage the people to drive more, meaning more demand that would push up world oil prices higher. What the US and the world need is less demand and not more. The objective could be achieved by raising the taxes on gasoline. Higher tax on gasoline would, also, help in bringing down the budget deficit, cutting the oil import bill and bringing urgency to the search for viable fossil-fuel alternatives.

It would be interesting to know that the oil consumers in the US are presently paying far less for oil than the oil consumers in Europe. According to the Energy Information Administration sources, oil consumers in the US were paying $3.45 per gallon of oil in March 2008 as against $8.38 per gallon by the consumers in the UK and $8.73 per gallon by the oil consumers in Norway. As reported by the International Energy Agency, the average gasoline taxes per gallon in March 2008 were $5.16 in Germany, $5.02 in the UK, $4.83 in France, $2.29 in Japan, $1.19 in Canada and only $0.40 in the US. One of the reasons for the higher oil consumption in the US, therefore, is the lower tax on gasoline and lower gasoline prices in the country.

Nevertheless, according to an article published in the Gulf News dated June 18, 2008, oil consumption in the US in 2007 was slightly lower than it was in 2004, which inter-alia indicates a slow but steady switch-over to alternative sources – away from fossil fuels. According to this article, latest statistics also indicate a slowing down in the demand for oil in China – the second largest oil consumer in the world after the US.

The aforesaid article argues that, in economics, what goes up comes down. Therefore, oil prices also can not continue rising for ever. The $ million question now is when will the oil price start coming down? The answer may be that the decline may come sooner than expected. The reason why the oil price can not maintain its upward trend for an indefinite period is that, contrary to the popular belief, the demand for oil is elastic which means that when prices rise beyond the level of market tolerance oil importing countries can and do reduce consumption.

At the moment, the global economy is witnessing a slowdown. Although the overall global economy may still be growing marginally, industrial production in most major economies is reported to be showing signs of stagnation. The housing and the automobile sectors in the US are in distress, unemployment has risen, stock market faces a slump and credit crunch is still taking its toll. The economic situation in the US is casting its dark shadow, also, over the economy of the European Union and Japan. The majority of the economic observers and analysts believe that the global economy may slide into a recession in not too distant a future. If it does, the global demand for oil may witness a nosedive.

It may be interesting to note that since the end of the Second World War, the global economy is reported to have experienced 10 recessions so far. All except one of those recessions started with a sharp rise in energy prices. All the aforesaid recessions had ended with a dramatic fall in oil prices. To quote an instance, oil prices had fallen by as much as 70 per cent at the end of the 1980 recession.

Perhaps, history may be on the way to repeating itself. The unprecedented rise in oil prices has already plunged the global economy into a slowdown. The process may accelerate within the next few months and the global economy may slide into a recession. That would be the time when the international oil prices may witness a nosedive.