Articles >

Rise in oil prices is worrisome for rich and poor alike

Published by The Straits Times, Singapore on 2004-09-30

Some 10,000 finance ministers, bankers, industrialists, lobbyists, academicians and journalists are gathering this week in Washington for the annual meetings of the World Bank and the International Monetary Fund. Traditionally, scores of private investment deals, and larger indications of global economic trends come out of this palaver. Third World nations also receive signals, however informally, of what to expect by way of aid.

All this is accomplished in between extended rounds of merrymaking. (Yes, gray-suited financiers can also kick up their heels, especially when fuelled by vintage champagne provided by some of the world's biggest financial institutions, including Asian banks.) But it's not going to be a cheerful meeting this time around.

Not only are new resources unlikely to be committed for Third World development, existing pledges from wealthy nations - currently under US$40 billion annually - may also be in jeopardy because of the tenuous state of the economies of many industrialised countries. Global trade - currently put at US$31 trillion annually - may also be affected as protectionist sentiments increase in major importing countries like the United States, where the current presidential campaign is already roiled with heated debate about outsourcing of jobs to poor nations.

And what has upset earlier projections of reasonably healthy global economic growth? The record rise in the price of crude oil to around US$50 a barrel - up 60 percent so far this year - has thrown everyone's calculus into chaos. The global economy has yet to fully recover from a lingering recession, and this year's Bank/IMF meetings were expected to devise ways to jumpstart sustainable economic development, particularly in the world's poorest 50 countries. Hardly anyone had counted on oil prices more than doubling from this time last year, when Dubai hosted the annual Bank/IMF meetings. (It will be Singapore's turn in 2006.)

Some experts contend that despite the rise in oil prices, economic growth in Asian countries like China, India and Japan - which import most of their oil to feed their surging economies - is unlikely to be affected in the short run. These countries have significant foreign-exchange surpluses - India alone has more than US$120 billion stashed abroad - that would certainly soften the impact of rising oil prices.

But common sense, coupled with the realities of the oil industry, suggests that tougher times lie ahead for poor as well as rich nations. Seasoned observers of the oil scene aver that US$100 a barrel may not seem such an unlikely scenario, especially if the current record demand of 80 million barrels a day continues, along with low spare production capacity and political turbulence in oil producing states such as Saudi Arabia, Venezuela, Nigeria and Russia.

By 2020, the daily oil demand was initially expected to be 103.2 million barrels, but the figure is likely to be surpassed long before then as developing-country economies keep expanding to keep up with the rising social and economic expectations of their growing populations. Already, annual world consumption is a billion barrels more than what was projected three years ago, mostly because of higher consumption by China, India and the US.

The 11 members of Opec, of course, are reveling - privately, to be sure - in the rest of the world's gathering anxiety. They will enjoy an unprecedented cash windfall this year - more than US$350 billion in revenues, or almost $80 billion more than what had been estimated. Opec finance ministers, who will be in attendance at the Washington meetings, will certainly come under pressure from their poor Third World brethren to ladle out some more cash than the measly US$100 million or so that they offer each year in grants to 124 other members of the Third World. (Despite their oil wealth, Opec nations are still considered part of the 135-nation Third World.)

They will also be under pressure to do something about the rising oil prices. After all, Opec was founded in Baghdad, Iraq, in 1960 to stabilize and harmonize global prices. It establishes a so-called "price band" as a marker for the market. The current price band ranges between US$22 and US$28 per barrel, well below what the market prices for the better quality of crude oil have been during the last few days.

In addition, Opec's daily production of 30 million barrels - its highest in 25 years - represents a little more than a third of the world's daily crude oil production. The rest of the oil comes from non-Opec nations such as Britain, Russia and Norway.

What if Opec increases its daily production? Wouldn't that help bring down world prices?

Well, it would help only if Opec were capable of pumping more oil each day. But it isn't. In 1980, Opec's spare daily capacity was 15 million barrels. Today it is less than a million barrels a day. And even though Saudi Arabia gallantly - but more likely in response to US pressure - announced this week that it would increase its daily output from 9.5 million barrels to 12 million barrels, it's questionable whether - and how quickly - the desert kingdom would be able to deliver on its promise. Typically, it takes a month between the time that oil is extracted from a well, shipped to a refinery, processed into petroleum or diesel, and supplied to consumers.

In our world of increasing globalisation, interdependence of countries as well as of economic sectors has become a particularly sensitive issue. That's because higher energy costs can hurt company earnings; they could depress stock markets, and also curtail consumer spending. Taken together, these factors would eventually slow global economic growth. Analysts usually expect a $10-a-barrel increase in oil prices to shave growth in the gross domestic product by 0.3 to 0.5 percentage points, according to Mr Simon Romero, the highly regarded energy expert of the New York Times.

So, as the World Bank and IMF meetings begin in Washington this week, the international participants can be forgiven if they wished that the world's oil supply were to flow as freely as the champagne served at the meeting's lavish - and free - soirees. They will certainly be hoping that the oil would be as cheap, too.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

© Copyright 2003 - 2008, - by Fluid Design