Rising oil prices was always the concern of middle class throughout the world who drive the economy fast than any other class people. Surge in oil prices faster than the income levels earned by middle class people has made governments tumble. In view of every raising demand in spite its heavy shortage in supply the rise in oil prices gained momentum to support the economic system from being collapsed. Though oil producing countries like U.S, U.K, Russia and Middle East countries are concerned about the increase in supply, due to shortage of resources in countries like U.S and U.K made the world to rely on Middle East countries for its oil supply. As the availability of alternatives for oil is not much in use it posed a threat to raise severe demand for oil which upsurge the rise in oil prices. For its latest India economic growth projections, ADB has factored in an average crude price of $104 per barrel during 2011-12 and $112 per barrel for 2012-13, Mr Rana Hasan, Principal Economist in ADB’s, India Resident Mission, told reporters here on the occasion of release of ADB’s flagship annual economic publication ‘Asian Development Outlook 2011′.
The first quarter of 2011 saw prices rising further because of disruptions in oil supplies from Egypt and Libya. Though the Organization of Petroleum Exporting Countries has increased production, inflationary fears over crude oil prices are getting stronger. The news of Osama bin Laden’s death had depressed oil prices temporarily. But they have begun rising again.
In its latest assessment of the world economic outlook, the International Monetary Fund (IMF) projects global oil prices to increase by more than 35 percent in 2011. The prediction may come good, given the current trends. From about $70 a barrel this time last year, oil prices increased to $125 a barrel at the end of April 2011. They dropped below $115 a barrel following bin Laden’s death. But this will probably be a short-lived trend because fears of greater turbulence in West Asia will lead to increase in prices
Impact of rising oil prices
The current rate of price increase has serious implications for China and India. It can recreate the scenario of 2008, when crude oil prices reached almost $150 a barrel, a few months before the collapse of Lehmann Brothers and the outbreak of the global financial crisis. With economic activity and GDP growth in both countries having recovered to pre-crisis levels, high oil prices pose major risks to their growth.
As two of the world’s leading oil consumers and crude oil importers, demand for oil in both countries is relatively price-inelastic. Given their growth trajectories, neither country will experience decline in demand for oil in spite of high prices. And as they keep buying oil at high prices, both will feel the impact on their balance of payments, inflation and GDP growth. Higher oil imports will reduce their trade surplus and bring down their current account balances.
China’s large trade surplus will help in absorbing a major part of high import costs and can marginally moderate the current account balance. For India, however, the scenario is more worrying. Its current account deficit of 3.2 percent of GDP can worsen because of high oil imports and a deteriorating trade balance.
India and China both will be worrying about the effect of oil prices on domestic inflation, too. High crude prices will lead to higher prices of gasoline, liquid petroleum gas, diesel and aviation fuel and result in higher producer and consumer prices in all domestic energy-intensive activities.
Inflation is already high in both countries. Further rise in domestic prices means more hardships for low and middle-income groups. India has already raised interest rates for tackling prices. High interest rates, however, can discourage investment and depress GDP growth. According to the IMF, if crude oil prices reach $150 a barrel, they may reduce GDP growth for 2011 by 0.50-0.75 percentage point in China and by about 0.25 percentage point in India.
Both countries are helpless when it comes to oil prices because they can hardly influence them. Lack of adequate oil supplies in the Asia-Pacific region ensures that China and India continue to depend on oil from North Africa and the Middle East. This dependence increases their vulnerability to supply disruptions in the Persian Gulf and the resultant volatility in oil prices.
A rise in global oil prices by $ 10 per barrel would reduce India’s economic growth by 0.2 percentage points and also affect the country’s current account deficit, Goldman Sach said.”A VAR (value-at-risk) analysis suggests that a $ 10 increase in oil would reduce GDP growth by 0.2 percentage point,” Goldman Sachs said in its latest edition of ‘Asia Economics Analyst’. India imports three quarters of its annual oil and gas requirements, with the Middle East and North Africa regions contributing to a substantial chunk of it. India’s import bills amount to $ 18 billion.
How to deal with rising oil prices
A possible option for both countries to reduce this dependency is to shift to other suppliers of oil and energy. Russia may be one such supplier. Europe is trying to reduce its reliance on the Middle East by procuring more oil from Russia. For China and India, too, Russia can be a feasible alternative, more so because China, India and Russia are members of the BRICS club and are already cooperating with each other on several issues.
A second course of action for minimizing the harms caused by high oil prices is to coordinate spot purchases of crude oil from the international market. In recent years, China and India both have been responsible for driving up prices in the global oil market because of their large demands. Both countries had discussed the possibility of coordinating spot purchases of crude oil during Premier Wen Jiabao’s visit to India in December 2010. So effective coordination of oil purchase will help both in avoiding unexpected volatility in prices.
A third option is to enter into more forward contracts with suppliers for future purchase of crude oil at previously agreed prices. But given the current high prices of oil, delivery prices in such contracts may also be high. This is where the negotiating skills of oil companies from both countries will be tested as they try to secure favourable forward delivery contracts.
Usage of alternative resources like solar energy, hydrogen energy, electrical energy, geothermal energy, bio-fuel stands as close-fitting alternative for promising sustainable availability of oil resources curbing the ever rising prices of oil.
Production of fuel efficient automobiles also favours a lot on saving grounds of highly costly non-renewable resource like oil and consumption from the common public should also be decreased, so that we ensure sufficient availability of oil for our future generations.
Role of OPEC
OPEC should regulate the rising oil prices by following methods:
• Regulation of rationing of quota of oil for various countries.
• Keeping the oil prices away from speculations of other influencing factors.
• Should control market volatility.
• Establish proper market conditions to meet the demand.
• Strive for increasing the supply of oil.
It’s the collective responsibility of the government and regulatory, production authorities, common public to ensure this precious non-renewable resource availability for future generation at the same time ensuring to meet the present requirements efficiently helps in the sustainable development.