Prospects of
the Pain at the Petrol Pump
In
this column a couple of weeks back I had talked
about the pain at the petrol pump owing to the doubling
of the cost of gas in less than a year. There has
since been a slight reduction in price but of little
consequence for the average Joe. What are the prospects
in the near and distant future?
Several oil economists, particularly those working
for the oil industry, present the future in dark
hues perhaps to mentally prepare the consumers for
higher prices.
While the producers have a cartel of their own,
called OPEC, the refiners and distributors, once
called the Seven Sisters, have also a similar arrangement.
Their number has expanded but their common interest
ties them together. Then there are the speculators,
the operators of the hedge funds, who artificially
bloat the per barrel price of crude.
Against these giants, poor Joe has no effective
setup to seek even a palliative for his pain. It
is beyond him to comprehend that the spurt in oil
prices has been caused by a jump in consumption
in China, India and South East Asia.
China is the principal target. Its constant high
growth rates over the past two decades have turned
it into the manufacturing floor of the world and
the chief supplier of numerous consumer items at
the lowest prices. Its currency is under severe
attack on the ground that it is too undervalued
for American producers to compete. To ensure a level
ground for them, the Chinese are being pressured
to revise upwards the exchange rate. The current
rate is $1.00= Yuan 8.28. This rate has remained
unchanged for almost a decade. And it is doubtful
that American manufacturers would have a favorable
competitive field even if the rate of the Yuan was
increased by 50%. Under US pressure, the Chinese
have already imposed 400% export tariff on their
textiles.
As for oil, the Americans consume, according to
the International Energy Agency, 21 million barrels
a day, a quarter of the world consumption of 84
million barrels. The Chinese rank next to America
with 6.4 million barrels a day.
America was the largest producer of crude till 1974
and still meets 60% of its needs locally, importing
some 9 million barrels a day. It ranks next to Saudi
Arabia in its output of crude oil. Saudi Arabia
produces 11.9 % of world output, the US 11.3 per
cent followed by Russia 8.8 % and Iran 5.1%.
China produces 3.5 million barrels a day locally
and imports around 3 million barrels. Its hunger
for energy is fast expanding. China is no longer
a nation that moved on bicycles. It has over 20
million vehicles on its roads. But that is not even
a patch on the 230 million on American roads four
years back. The number must be higher now.
China has already reached a stage where it is making
its own cars – all components. Because of
the fast expanding demand, several foreign manufacturers
like General Motors, Ford, Toyota etc. have also
set up plants in that country.
China, with a population of 1.2 billion and a per
capita income of $1200 per annum, is still a poor
country compared with the per capita incomes in
Europe and America. But it is fast growing and its
economy is generally predicted to overtake that
of the US in another quarter of a century in respect
of its GDP. No wonder, China has been investing
heavily in oil-bearing regions abroad. One of China’s
interests in building the Gwadar port was its proximity
to the oil-rich Persian Gulf.
China’s coal-fired generators have grown old
and unreliable. Several manufacturers with large
overseas contracts have installed their own diesel-fueled
generators adding to the country’s oil imports.
The world demand of crude has gone up over the past
year by 2.7 million barrels a day, one-third of
this increase has been attributed to the Chinese.
As for the future, the prospects are not as bleak
as some economist made it out to be. The prime reason
is that the world oil reserves are still quite substantial
and will meet even the increasing demands for a
hundred years or more. The main difficulties comprise
physical limitations on output, limited refining
facilities and constraints on transportation through
pipelines.
The oil discovered recently in the Caspian Sea region
is thought to be next only to the reserves in the
Middle East.
Only last week, on May 25 to be exact, the first
section of the 1,100 mile pipeline that will carry
Caspian Sea oil from a terminal at Sangachal in
Azerbaijan to Ceyhan a Turkish port on the Mediterranean,
was inaugurated. This $3.2 billion project, with
a capacity of 1 million barrels a day, has been
called the new “silk road” and a monumental
achievement.
In a message on the occasion, President Bush observed:
“The US has considerably supported the pipeline
project because we believe in the project’s
ability to bolster energy security, strengthen participating
countries; energy diversity, enhance regional cooperation
and expand international investment opportunities.”
The pipeline that took over ten years to build and
will unlock one of the biggest world energy reserves,
was built by a consortium led by UK oil giant British
Petroleum (BP) and more than ten other energy giants.
The pipeline has a capacity of 10 million barrels
and will take several months to fill before becoming
operative.
Several pipelines to carry oil and gas from Iran,
and central Asian states to energy hungry India,
are stalled owing to the volatile situation in Afghanistan
and Balochistan. The need for energy is much more
compelling than the narrow interests of certain
sectors of the area. They will have to bend or break,
the pipeline will be built in their own narrow interests
as well as in national and international interests.
The very day that the Caspian Sea oil pipeline was
inaugurated, Pakistan signed six agreements with
international companies to carry out exploration
in Balochistan, Frontier Province and Sindh –
the very provinces considered to be volatile. Such
deterrents are pushed to the side when major objectives
are to be achieved. The Chinese went ahead with
Gwadar despite threats and murder of three engineers.
The OPEC members have offered to increase their
production to the extent they can. Saudi Arabia
is likely to increase its output by as much as 1.5
million barrels a day. The will be thus no pressure
on the price owing to short supply. The pressure
should instead be on price manipulators.
As for the US, the Bush Administration moved a bill
on April 20, 2005 in the House 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.
To recap, one may say that the current scenario
does not forecast a bleak future. The price of oil
at the petrol pump may not go down to the level
of what it was a year back, but it is unlikely to
keep shooting up either. It is more likely to move
southward.
(arifhussaini@hotmail.com
May 27, 2005)
