Soaring oil prices: a global concern
By Aftab Ahmad

The international oil prices crossed the $98 a barrel mark on November 7. The same now, appears poised, to cross the $100 a barrel mark, which it can hit at any time in the coming days and weeks.

Light sweet crude soared to $98.62 a barrel on November 7 on the New York Mercantile Exchange, while Brent Crude moved up to $95.19 a barrel in London on the same day. Oil market analysts have attributed the latest upsurge in oil prices to a multitude of factors, which are summarised below.

First, the oil prices rose due to the geo-political situation. The oil market analysts had feared that the clash between the Turkish forces and Kurdish rebels could lead to complete disruption of oil supplies from Iraq which could send the oil prices soaring. Also, the row between Iran and the West over Iran’s nuclear programme has not so far been resolved and the US President had warned that if Iran was not stopped from pursuing its nuclear programme, the same could ultimately lead to the third Word War. The aforesaid situation can, therefore, also put pressure on oil prices as long as it remains unresolved. Lately, an oil pipeline in Yemen was broken resulting in reduction of about one and a half million barrels of oil per day from the global oil supply.

Second, according to oil market analysts, technical buying by investment funds was also putting tremendous pressure on oil prices. Data released recently had reportedly shown that speculative buying of oil contracts had increased in recent weeks. According to press reports, many investment funds automatically buy or sell oil futures when prices cross certain agreed limits. Since oil prices had already pushed into a new record territory, crossing several of the limits in recent days, new buying by investment funds had taken place, driving oil prices considerably higher.

Third, the US Energy Department reported, in the last week of October, that crude inventories had dipped by as much as 3.9 million barrels, when the same were actually expected to register a marginal increase. The International Energy Agency (IEA) had also confirmed earlier that oil inventories held by the world’s largest industrialised nations had fallen below a five-year average. The fact that oil inventories had dipped was being interpreted by the oil market to mean that demand had yet to slow down to allow stocks to build.

Fourth, the fear of floods had recently forced the oil producers in the Gulf of Mexico to cut a fifth of their oil production. As a result, the oil supply had gone down at a time when the demand for oil was expected to pick up due to the approaching winter season in the northern hemisphere.

Fifth, the recent weakness of the US dollar was also one of the main factors responsible for the latest surge in the international oil prices. A Saudi newspaper had recently quoted OPEC sources as saying that the higher oil prices would shield OPEC nations, many of whom had pegged their currencies to the US dollar, against the current dollar weakness. Another OPEC source had been quoted as saying by Al-Riyadh that the sliding dollar had an adverse impact on OPEC member states’ oil revenues. However, the higher oil prices would help them overcome the loss in revenue and ensure continuity of energy investment planned by the OPEC member states over the next five years. In addition to the above, since oil is a dollar-denominated commodity, the sliding dollar had facilitated speculative buying of oil contracts by groups having access to stronger currencies such as euro.

Last but not the least; the growing demand-supply gap is also keeping the international oil prices under pressure. While oil supplies remain constrained due to present geo-political situation and substantial increase in the cost of oil exploration, the global demand for oil has been going up in line with the increase in the global economic growth.

The GDP growth rates have picked up to 5-9 per cent not only in Asia but also in East Europe, Russia, the Middle East, Latin America and even Africa. Increase in the global economic growth has naturally led to a proportionate increase in the global demand for oil. Since supply is not picking up due to a multitude of constraints, as explained in the preceding paragraphs, the international oil prices have shown an upward trend.

The latest upsurge in the international oil prices has come as a challenge to the developing as well as the developed nations, depending on imported oil. However, the upsurge has particularly hard-hit those of the developing countries which depend on imported oil to meet bulk of their requirement of oil, such as Pakistan.

In recent years, Pakistan’s oil import bill has already gone up to $6-7 billion. With the latest upsurge in oil prices, the oil import bill would definitely go up further. This is going to happen at a time, when the country is already faced with the challenge of the ballooning trade/current account deficit.

In order to deal with the oil situation, the government has already been taking a number of steps in recent years. For instance, the government has boosted its oil exploration efforts. Besides, the use of CNG has been promoted aggressively during the last few years. Some 1,414 CNG stations (as of April 2007) are operational in 85 cities and about 1.35 million vehicles are using CNG, at present. With the aforesaid development, Pakistan has become the leading country in Asia and the third largest user of CNG in the world, after Argentine and Brazil.

An effort had also been made recently to introduce ethanol (mixed with oil) to reduce the consumption of oil. However, the use of ethanol has remained negligible so far in this country. In some other industrialised countries also, increased use of ethanol had led to certain problems such as an upsurge in the prices of corn and poultry feed etc.

In some industrialised countries, such as the US, the government has asked the auto manufacturers to accelerate the production of fuel-efficient and hybrid cars. Accordingly, production of sports cars and some other large automobiles, consuming more oil, has come down and the production of small and fuel-efficient cars is going up. It is an irony that in our country, the number of luxurious and large cars is on the increase. What are we going to do with these cars, if oil is not available in sufficient quantities?

Some of the observers and analysts have suggested cutting the local demand for oil by increasing its price. However, the measure does not appear to be advisable at a time when the food inflation is running at 10 per cent to 13 per cent.

The government has, no doubt, taken a step in the right direction by keeping the local oil prices unchanged for so many fortnights. Some other observers have suggested appropriate legislation forcing a net reduction in the country’s oil consumption. In other words, they have suggested rationing of oil to contain oil imports and local oil consumption. In the past, price control and rationing of sugar had led to the sale of sugar in the black-market. However, there seems to be no harm in trying rationing of oil, if the government finds it administratively possible to do so.

Over and above all that, all possible efforts have to be taken to boost the exports earnings in order to be able to finance the higher oil import bill. During the last one year, the exports have nearly stagnated. It would, therefore, be extremely difficult to pay the higher import bill unless we are able to accelerate the growth of our exports and bring it to double digits as before.