The Pain at
the Petrol Pump
The pain of having to shell out
almost twice as much as you did for refilling your
car tank only a year back, might remain with you
unmitigated in the foreseeable future. So, you had
better accept it without pining or even mulling
much over it. You cannot do that if you are in my
category of being retired on a meager pension and
no ostrich egg in the nest.
Eminent US economists are already exercising their
minds over the extent to which high energy prices
would crimp economic activity in this country that
is already beleaguered by yawning budget deficits,
caused mainly by high defense expenses in Iraq and
Afghanistan and on worldwide military bases, on
the war on terror, and an unsettling trade deficit
– imports far exceeding exports and continuously.
The high cost of crude oil is attributed to the
spurt in the demands of that commodity in fast developing
economies, especially in China and India.
Swelled by surging petrol prices, consumer prices
in the US have climbed at a fast pace over the past
six months. And, since the beginning of 2005, the
prices have increased at an annualized pace of 4.3
% - the highest rate since 1990.
The inflation figures have put the Federal Reserve
officials into a tougher and more worrisome bend.
They face the tough task of maintaining the current
economic recovery, since the slump of 2001, while
keeping under strict check further expansion of
inflation. If the Fed uses its standard formula
of increasing tax rate to check inflation, it slows
down economic activity. That is the dilemma facing
the Fed economists.
The Bush administration has inspired a bill in the
House just a few days back, April 20 to be exact,
proposing long-term measures to address oil price
volatility. The proposals include tax breaks to
promote domestic oil production and speedy approval
of new refineries. Such measures would provide little
immediate relief. The bill has also been faulted
for catering to special and regional interests.
The 1000-page bill has been prepared by a task force
headed by Vice President Dick Cheney, a former chief
of the notorious Halliburton Co.
The advent of $50 a barrel oil signals, according
to Robert Samuelson of Newsweek, marks the dawn
of a new oil era in the economics and politics of
energy.
International Energy Agency (IEA) points out that
the Americans consume 21 million barrels of oil
a day, a quarter of the world consumption of 84
million barrels a day. China ranks second now to
America with 6.4 million barrels a day. America,
the largest producer of crude till 1974, still meets
60% of its needs domestically, importing some 9
million barrels a day to meet the shortfall. China
produces 3.5 million barrels a day locally and imports
around 3 million barrels a day. But its dependence
on imports is fast increasing as its economy is
constantly expanding and that too at a fast pace.
For instance, world demand increased suddenly by
2.7 million barrels a day, a third of this jump
was caused by increased Chinese purchases. China
is now the manufacturing floor of the world and
has thus become a voracious consumer of energy.
Traditional coal-fired generators of China are unable
to keep pace with the demand. Several industrial
complexes have therefore installed their own generators,
all of them consuming fuel oil. Then, there is the
fast expanding demand of motor vehicles. Bicycles
are fast making room for cars.
China has now 20 million cars and trucks, and going
by the demand graph, the country may have 120 million
vehicles within the next fifteen years. Since the
beginning of 2002, the Chinese auto sector has registered
a shocking growth of 60-80 per cent.
America had in 2001, 230 million cars. These vehicles
consume more than four times as much fuel as the
rest of the world. Fortunately, the US is a major
oil producer itself. It ranks next only to Saudi
Arabia in its output of crude oil. Saudi Arabia
produces 11.9 % of the world output, the US 11.3
% followed by Russia 8.8% and Iran 5.1%.
According to the normal demand/supply formula of
economics, the current high price of gas should
have caused a reduction in demand. It has no doubt
caused discomfort to the consumers but has not deterred
their consumption. People in America enjoy high
incomes and high consumption. Hence, the demand
has not sagged substantially.
The countries most adversely affected are those
that do not have oil wells. Pakistan is one such
unfortunate country. The government has not much
leeway for managing the price at petrol pumps. Any
increase in petrol and diesel prices immediately
raises the prices of almost all other consumer items.
Industrialization in the country is also advancing
now at a good pace. The consequent increase in the
demand for electric power points to the inevitability
of new dams for power production. Also it underlines
the need for the laying down of pipeline for the
import of gas from neighboring Central Asian states.
Such pipelines have become unavoidable for the supply
of natural gas to the fast expanding industrial
base of India too.
The current American anti-Iran stance may have moved
the Iran-Pakistan-India pipeline project to the
back burner, but before long India will have to
take it up to ensure the supply of energy to its
expanding industrial demands.
A closer study of the current price surge reveals
that it would be incorrect to attribute it totally
to the enhanced demand in China, India, Japan and
Korea. No doubt, the robust Asian demand has been
the primary driver behind the increase in prices,
but the speculators too have played no mean role
in manipulating the crude oil price. Speculative
interest in oil futures on the New York Mercantile
Exchange has touched the highest ever level. Their
speculations have accelerated the upward price spiral.
They have been constantly exaggerating the terrorist
threats to supply channels. But the terrorists have
not disrupted these but have targeted instead the
expatriate workers. The current frenzy has therefore
been aggravated by the greedy speculators, and it
might fizzle out as quickly as it has surfaced.
China will be the real and chief driving force behind
the price trend. Some economists feel that the Chinese
economy has already become over-heated and may collapse
like the ‘dot com’ bubble. That sounds
quite exaggerated.
The International Energy Agency(IEA) has predicted
that the growth in demand this year will be in the
highest in 16 years. Irrespective of how the speculators
manipulate the price, the strong demand spurred
by China and India will continue in the foreseeable
future. The current price of $50 and above, doctored
by speculators, is likely to come down to $35 per
barrel.
That would considerably reduce the pain at the petrol
pumps not only in the US, India and Pakistan but
all over the world, one hopes sincerely.
- arifhussaini@hotmail.com
April 22, 2005
