It's unfair to blame Asia for high oil prices

WHENEVER we refer to current oil prices, it is worth noting Thomas Friedman's optimism ahead of the US-led invasion of Iraq . The New York Times columnist suggested in 2003 that a new Iraqi regime could "in short order ramp up its oil production to 5 million barrels per day (mbpd)", and cause a crash to $6 a barrel, last experienced in 1973.

By Dr N Janardhan (Gulf Angle)

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Published: Fri 21 Dec 2007, 9:34 AM

Last updated: Sun 5 Apr 2015, 1:08 AM

To be fair to Friedman, very few have got it right while predicting oil prices, but it is also true that very few got it as wrong. Some felt that $40 per barrel was expensive, others insisted that $60 was unsustainable, and still others were confident that $80 would never happen. However, since the Iraq war, oil prices have surged from about $37 a barrel to more than $90 recently, after briefly threatening to even cross the psychological $100 barrier.

Opec signalled this month that increased output is not the real answer and that it is looking at a $70-80 per barrel price band. But, while The World Energy Outlook 2007 estimates that $159 a barrel by 2030 is possible, an American expert predicts that oil prices would reach $200 in 2010 - "$65 a barrel translates to 10 cents a cup, still 10 times cheaper than bottled water". It is worth noting that some calculations of oil price history using the 1980 consumer price index method shows that the 1980 price of $39.50 per barrel "is the equivalent of over $200 per barrel in today's anaemic dollars", thus making "$100 oil still look quite cheap".

The reigning price has been blamed on a combination of geopolitical instability, a shortfall in refining and spare capacities, and financial speculation (and a weak dollar, of course). However, unlike in the past, the current trend has not been influenced by any one conflict or physical shortage. Instead, as emphasised by the Qatar energy minister, financial players - who "lost a lot of money on real estate, shares and bonds, and then they jumped to commodities," including oil - are largely responsible.

In fact, the US played into the hands of speculators by first invading Iraq, then not stabilising it militarily, politically and economically, and then failing to increase production in that oil-rich country. More importantly, the US shot itself in the foot and others with its high-intensity rhetoric against Iran for the past four years, despite knowing that it cannot walk the talk. This has kept the prices higher by at least 10-15 per cent and as much as $30 above normal prices. It remains to be seen if the latest assertion by the National Intelligence Estimate on Iran will calm the markets in any way.

But amid all the noise about high prices from the West, Asia chugs along. While a lot has been said about how prices will affect growth, Asia has so far been successful in absorbing the high prices because of rapid economic growth. And, it needs oil, irrespective of price, to sustain this growth. Conversely, European and American economies are not growing at the same rate, which makes them scream for lower prices.

Public reaction to high prices has also differed. Asia subsidises oil considerably, which serves as a cushion against public discontent. China and India are footing a $15 billion bill annually in subsidies out of a reported $50 billion incurred across all developing countries. The Indian crude basket has risen by 145 per cent since April 2004, but retail prices of petrol and diesel have gone up only 29 and 40 per cent respectively. With elections in one state or the other being held every year, and the coalition at the centre appearing rocky, the government is hesitant to risk voters' ire by hiking prices. However, subsidies are not a permanent solution and high oil prices have contributed to high inflation rates. China's, for example, is at an 11-year high, which is equally politically sensitive.

While critics point a finger at Asian governments for their largesse, others criticise the European counterparts for not reducing high taxes on oil prices, which are an important component of state revenue. The American economic slowdown is also forcing a reconsideration of the degree of subsidies, resulting in the governments of the developed countries becoming vulnerable to public anger with potential for political losses too.

With world oil consumption likely to grow from 85 mbpd to 118 mbpd in 25 years, developing countries are likely to consume about 60 mbpd. Yet, there are only about 2 mbpd of extra production capacity as opposed to about 6 mbpd in 2002. According to the Energy Information Administration (EIA), investment is critical, with about $5.3 trillion needed to boost oil production. It is estimated that by 2015, Chinese and Indian populations are expected to grow by about 240 million, and their crude import to quadruple by 2030, which could neutralise new production capacity that Saudi Arabia is adding.

On the supply side, about 60 per cent of the world's oil reserves are in the Middle East, which produces 25 mbpd. Five of the top six countries are from the Gulf. By 2030, the main oil players in the Gulf region will add about 13 mbpd to their current production levels. The UAE hopes to increase production to 4.6 million barrels. According to the reference case scenario of the EIA, Iraq may produce up to 5.5 mbpd, and Iran too. Thus, the Asian thirst and Gulf production increase guarantees demand security for Gulf oil producers. Further, despite all the talk, the share of non-conventional energy sources is expected to be only 12 mbpd in 2030.

It is true that during the past 18 months, more than two-thirds of the growth in global oil demand came from India and China. Yet, it is unfair to blame Asian demand for high oil prices and climate change when their economies are trying to catch up with the West. It must be remembered that energy-use per person in Asia is still much lower than in the West. Opec secretary-general gave India and China a clean chit: they are "not responsible for the rise in oil prices".

So where are we headed? It is unlikely that conservation or alternative energy sources or pumping more oil are solutions. Many experts are making an unorthodox recommendation to cool prices — halt trading of crude oil on commodity exchanges.

Just a move away from fossil fuel consumption alone, as a means of addressing climate change, does not represent a practical alternative to reducing greenhouse gas emissions, it is equally unreasonable to expect developing economies to bear the responsibility of deriving new growth patterns that don't put pressure on global oil prices. The need of the hour is not only to develop partnerships between producers and consumers guaranteeing demand and supply, but also understanding between developed and developing economies on technology transfer, which will lead to efficient resource utilisation, thereby contributing to a more sustainable world.

But, this is easier said than done. For the foreseeable practical future, artificial or real, high oil prices will rule the roost.

Dr N Janardhan is a UAE-based analyst on Gulf-Asia affairs

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