Oil: Is there any light in sight?

Oil-price hike is most probably the hottest topic today. Ask anyone about the issue and chances are, he will surely have some view-point. Viewpoints depend a lot on on whom you are talking to and this makes the understanding of the problem even more difficult. OECD members blame the growing demand from emerging countries like China and India, exporting countries put the blame on weakening dollar, importing counties but the blame on oil producing countries and so on. The prices are certainly complex function of all the above and lot more. Since more than 80% of the global population is bearing the brunt, I am trying to make a layman understand the complexities involved, through this post.


Logically price is a function of demand and supply but in current context, the price is really not following strictly the laws of economics.Geo-politics, increasing fear of depleting oil and peak-oil theory (and not having any alternative of oil even after 130 years), increasing demand by China and India (the growing demand centres) and lastly a weak dollar (mode of transaction of more than 95% of oil trade) seem to be the main contributors of this problem.

After a stable or depleting North Sea (Europe) and Gulf coast (N America)oil-fields, Mid-east, Africa, Russia and S. America are feeding the global crude oil requirement.Unfortunately all these regions are politically unstable. US-Iraq, US-Iran, Israel-Mideast, Nigerian attacks are affecting the price, creating panic amongst the buyers.

Off late, China and India has started showing their presence in the energy market. Emergence of manufacturing sector, growing numbers of vehicles and domestic consumption have been the main factors. The demand in these countries is increasing at a much higher rate than global average, whereas OECD consumption growth is negative. Without doing much number crunching, a quick glance over the energy-globe will give a fair idea. Increasing presence in Africa (where many oil producing countries are situated) as investor and buyer is a testimony of their growing demand. And none of the present studies show any decline in consumption in a five-year time frame, to say the least.

On the other hand the supplies is dwindling. Oil is a depleting resource .Peak oil theory endorses that the oil production is decreasing and within a span of 60-70 years (this figure is highly debatable) oil may start showing disappearing signs. The major oil-fields are already seeing decline (Africa is a likely exception) in production and not many new finds are substituting them.Growing demand and declining supplies are deadly combination for further price hikes. With no clear commercially exploitable alternative in sight replacing crude oil, a bleak and black future awaits oil importing countries.

Weakening dollar is also doing its bit.Crude transactions are mostly in dollars and a weak dollar certainly does not help. Weak dollar reduces the value of crude for producers (when the buyers' currency is not dollar) and hence in return the price increases to offset the same. Though Iran is the first major oil-producing country ( though Iraq was also supposed to have done it in the past) to convert to euro, the decision is more politically motivated. Moreover euro cannot be seen as a threat to dollar at present, because of difference in magnitude of transactions done in both currencies. This leaves a strong dollar only bet for oil importing countries.

All said and done,it is very difficult to finally single-out one reason for this price hike. It is a complex function of above and much more. High corruption in many oil-producing countries, ongoing civil wars etc add on the speculation and keep the prices abnormally high. Prices of US$ 200 per barrel, which at present seem to be highly speculative (and it is so) can become reality in few months, as it happened with price-forecasts of US$ 100 and US$ 125 per barrel.

Till then read this blog and enjoy.