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Oil highs

AT THEIR present trajectory, oil prices will breach the $100 per barrel mark sometime during the next week. And suddenly calm nerves shrugging off stagflation concerns too appear jittery as brokers rightly imply ‘we’re stepping into an unknown area’. As feared, oil might just prompt a repeat performance of the painful low-growth high-prices experience of the ‘70s.

It will be some time before oil ceases to be the lifeline of the global economic system. Uncontrolled input price rise invariably implies similar increases across the board, flirting evermore with the inflation genie as rising economies looked to ease interest rates in a bid to pick up growth in the immediate aftermath of the summer’s credit crunch.

The surprise fall in US crude reserves that jacked up the international price to $96 a barrel on Thursday is yet another indicator of how both natural and manmade forces are influencing the oil-price phenomenon, increasing that much more the opportunity cost of needless political blunders that indirectly and invariably hit oil owing to the modern economic system’s integration dynamics.

Not helped at all by the dipping dollar, oil price was done no favours by the expanding violence in Iraq, the continuing West-Iran uranium standoff, Israel’s increased regional muscle flexing and Turkish threats of cross-border raids on Kurdish mountains sheltering PKK rebels.

Then there’s unending violence in Nigeria’s main oil-producing areas and supply crunches because of tropical hurricanes on the Caribbean coast, reining in a good fifth of Mexican production. Add to that roaring demand from Chinese, Gulf and expanding Asian economies at a time when the western winter season is bracing for more demand than usual, and there’s only one direction any pundit can point oil price in – up.

Signs of nervousness are already abundant in much of Asia, with subsidy dependant industries taking a hit and politicians squabbling with market specialists over political correctness of price increases, especially in places where elections are not very far off.

And there’s not much blaming Opec can do. Despite raising output by 500,000 barrels a day, the cartel is right in implying it cannot set the price, it never has, since “it is market driven and it is out of control”.

In many ways, the current situation epitomises the fragility of the modern economic system, heavily dependant as it is on one commodity alone as its principal life and breath. While the short run will comprise compromise and adjustment, the long run must entail diversification of energy input and increased investment in developing alternate sources of energy. Oil has had its high, now it is its price that’ll have the same.