January
12, 2007
Prospects of Pain at the Petrol
Pump
In this column I had talked,
more than a year back, about the pain at the petrol
pump owing to the doubling of the cost of gas in
the preceding year or so. The price started sliding
down a few months months before the mid term elections.
Once the elections were over, it started climbing
up steadily till it reached once more the level
of around $2.60 per gallon. Over the past week,
there has again been a slight reduction in price
but it is 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
yet higher prices.
While the producers have a cartel of their own,
called OPEC, the refiners and distributers, 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
set-up 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 of the spin doctors
engaged by the oil industry.
No doubt, China’s constant high growth rates
over the past two decades have turned it into the
manufacturing floor of the world. 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 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 U.S. pressure, the Chinese
have already imposed 400% export tarrif 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 U.S. 11.3 %
followed by Russia 8.8 % and Iran 5.1%.
China produces 3.5 million barrels a day locally
and imports, on an average, around 3 million barrels
daily. 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 mllion 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 have also set
up plants in that country.
China, with a population of 1.2 billion and a per
capita income of $1,200 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 U.S. 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 Gwader port, 60 miles
west of Karachi, was its proximity to the oil-rich
Persian Gulf.
China’s coal-fired generators have grown old
and unreliable. Several manufacturers with large
overseas orders have installed their own diesel-fueled
generators adding to the country’s oil imports
and pollution of its environment.
The world demand of crude has gone up over the past
couple of years 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 make it out to be. The prime reason
is that even the known world oil reserves are still
quite substantial and will meet 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.
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 1 ½ year back. Work is progressing
fast for the completion of this $3.2 billion project
with a capacity of 10 million barrels a day; it
has been called the new “silk road”
and a monumental achievement.
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 pipelines will be built.
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 Gwader
despite threats and murder of three Chinese engineers.
The port was completed ahead of time and is now
operative.
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. There will be thus no pressure
on the price owing to short supply. The pressure
should instead be on price manupulators. Speculative
interest in oil futures on the New York Mercantile
Exchange has reached the highest level over the
past decade. They push the price up by exaggerating
the terrotist threat to the Middle East pipelines.
Even the admission to a hospital of the Saudi monarch
for just a day or so was made an excuse for price
increase holding out the fear of instability should
he pass away.
To recap, one may say that objectively the current
scenario does not portend a bleak future. The price
of oil at the petrol pump may not go down to the
level of what it was just prior to the elections
in November 2006, but it is unlikely to keep shooting
up dramatically either. Yet, it is susceptible to
the mergers of oil companies and the clout of the
speculators to manipulate the price of crude as
well as the refined products. The price is hardly
determined now solely by the market forces of supply
and demand. The only cap on the manipulations of
oil giants is the price going above the capacity
of the average Joe. (arifhussaini@hotmail.com January
5, 2007)
