Friday, 23 October 2009

Obil Boil

Oil on the boil again, screams the headlines in India’s Economic Times. Or as our wonderful little friend Chotu might say, Obil Boil. I am certain that his words were prescient and not just a child’s lisp of mama’s olive oil.

Crude oil prices have touched $80 a barrel. The US dollar has continued to weaken and since oil prices are globally stated in US dollars, they are bound to rise further. I argued that the world must get ready for expensive energy for the foreseeable future here, but governments have lost a golden opportunity, when oil prices were low consequent to the recession, to prepare their citizens for the coming times when oil prices will be in 3 digits.

This has profound implications for the whole world. Firstly inflation will inexorably rise. The risk of inflation in the near term is the highest, with two huge factors contributing to it – the price of oil and the stimulus money that governments have spent. When oil prices rose last time to the peak of $147 , we had riots as it has a direct impact on the cost of food. The impact on poorer countries was disproportionate. Secondly the world will see a massive transfer of wealth from everywhere to OPEC – primarily the Middle East. Such a transfer of wealth is without parallel in history, with profound geopolitical fallouts.Churchill’s famous words may have to be rephrased to “never in the field of human history have so many paid so much to so few”.

Even now, it isn’t too late for governments to act. They must slowly abolish all subsidies on petroleum and then keep increasing the price of petroleum products in small doses so that people are slowly taken to the high oil price world, instead of a cataclysmic jump. They must not reduce prices when crude oil weakens occasionally – instead they should build up a fund to cushion against periods of extreme rise.

One of the possible fallouts of a sustained high oil price world might be that the world will start to go more local than go more global. Products may start to be produced nearer where they are consumed. Jetsetting around the world may start to become rarer. Brits having strawberries in December may become a thing of the past. Perhaps in the world of the future, a Chotu saying Obil Boil, may become common place and not raise an aaawww anymore. Now, that is not a nice thought.


Sandhya Sriram said...

Since you like Madras auto drivers a lot, i would like to draw a parallel - you cannot regulate, you cannot boycott, so you pay what is asked for. the more burning your need, the greater the premium.

The other perspective on this is that where is all the money going?

The lavish infrastructure dosen't justify even a small portion of the money. sometimes wonder if there is a secret super power world building somewhere unknown to all of us which is just waiting for the right timing to take over earth like it comes in alien movies

Durga said...

Governments to abolish subsidies and increase prices? Bah! They are giving subsidies as well as hiking prices simultaneously. Subsidies never seem to subside, with our government declaring a deficit budget year after year. What's the point? The vulnerable layman is still burning a hole in his pocket without an inkling as to where all the subsidies go.

Ramesh said...

@sandhya - Lovely comparison with the Madras auto driver !! W'll in the case of high oil prices, you know where the money is going - just drive around in Dubai !!

@Durga - I know they'll never do it. World over, subsidies are to pander to vote banks. But in this case, I'm afraid subsidies will just not be affordable and governments will have no choice unless they want to go the Zimbabwe way.

Exkalibur666 said...

We as a society need to move away from the Carbon based economy..that is the only long term solution. A non hydro carbon based world economy is also the only long term solution for climate change. A very easy to write and very vert difficult to impliment.
Transfer of wealth to OPEC and the middleeast is really dangerous cause that does fuel terrorism as we all know. When we pay for petrol we pay to get terrorised as well!!!

A journey called Life said...

all that concentration of money in the Middle East is such a scary prospect, just imagine, all the 'noble' causes the money will be used for.. it has more far reaching effects than the obvious economic and geopolitical ones..
(sorry this comment is way off mark from the actual implications of rising crude oil prices)

Adesh Sidhu said...

Logically Yes. Crude prices will go up as price of operating oil fields is going up. Machinery is getting costly, labor is costly and everything will keep increasing in times to come. Oh! yes, greed of countries with oil resources will also go up.

Politically No. Very few governments have courage to take decision in which there is short term loss and long term gains. Every Government think of staying in power and coming to power next time.

As usual nice analysis.

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Anonymous said...

Speaking of the massive transfer of wealth from everywhere to OPEC: From what you have written, I understand the underlying problem for oil rise is the weakening of US dollar. I also understood (with my feeble business brain) that the recent recession was triggered by the greed of a few giant US bankers/financial institutions. So, it is not only in the future, but also in the past that there is huge concentration of wealth in a single country, so the world is already adaptive to such a condition. Also as history says it, no single country can continue to dominate forever. Regarding terrrorism, where do the middle east(By the way,not all muslim countries are terrorists-they have been projected like that,me believes) get their arms,but from the largest producers, and the big boss of the world?

This is why I don't want to know business-it is an unjust world. Everything in business is measured based on a single currency. If only there is an universal,unbiased standard,oil prices, for that matter,all prices will not surge in one go!!
Now,think of the plight of the lorry,truck and auto drivers in the developing world. It definitely boils,Chotu!!

Sorry for the long comment, sorry if it sounded too ignorant. I just poured out what I feel, and never, ever, do I want to land up in the US!!

Unknown said...
This comment has been removed by the author.
Unknown said...

Well, I only hope that this turns out to be a blessing in disguise, and that the hike in oil prices drives companies and people to innovate and increasingly tap non -conventional energy sources,.. and also save mother earth in the process.

Looking inward, are we all playing role in this cataclysm?

When I see houses with 4 inmates and 15 cars ( I am not exaggerating), I realise that we are all equally contributing to the spurt in oil prices. I see parents use their cars to drop their 14 year old "child" at the main gate of their community which is all of 200 metres from their house because their "child" is scared to cross the road! No wonder then that oil prices are moving northwards...

Sandhya said - " you cannot regulate, you cannot boycott...."

Just wondering - Is there anyway be CAN boycott? Reduce dependence may be? Push our Governments for better public transport systems? Car pool? Teach our children that walking was quite a popular mode of trasport once upon a time? Is this just wishful thinking?

A journey called Life said...

@lakshmi- totally loved ur take on this one.. honestly i did not think on these lines

Ramesh said...

@Exkalibur - Absolutely right. We have to find alternative energy sources, which will happen no doubt. But until then, tough choices have to be made.

@AJCL - This transfer of wealth is the most dangerous thing facing us. Its not just Middle East. Its Russia too.

@Adesh - Well said. Costs of extracting crude are actually quite low and even if they rise its not a material impact. The problem is demand is outstripping supply. And you are absolutely right - show me a government thas willing to take tough decisions. The nearest to that ideal is actually the Chinese government.

Ramesh said...

@athivas - A good and reasoned comment indeed. However you are being harsh on the US. Despite all that is said, the US is still the engine of world prosperity - the place where most innovations are made, where freedom and creativity form a potent mixutre. Sure they have their faults, but at the end, I think there is no nation that can match the contribution of the US. They are currently down, but if I were to bet on one nation that can come roaring back, its the US.

@Lakshmi - Absolutely right.Each of us must contribute and maybe as you say this is a blessing in disguise. Wake up call for energy conservation. Its going to happen automatically when oil touches $150. There is a lot of good from a high oil price, but the problem is that it will hit the poor because of its impact on food prices.

Anonymous said...

I am not harsh on the US,Ramesh, only that I think their attitude on other countries, and they way they have the world in their control is intolerable.

sri said...

waah its so scary to think of the higher prices, but I see the flip side to this story, I mean if it keeps going high people have to cut back on Oil usage and fallover to other alternative sources, like electricity and solar, plus supporting local food products is great thing, yet the travel charges would be very large, esp the airfares, in case they dont find an alternative to fly planes!

I liked sandhya's comment and your reply to her, and I second AJCL words on US.

Ramesh said...

@sri - Yesh its scary and the consequences are not very predictable as oil affects virtually everything we do. The scariest is the possibility of food riots like it happened last time.

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