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Higher crude oil prices may fuel inflation

Higher crude oil prices may fuel inflation
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First Published: Mon, Sep 28 2009. 10 03 PM IST

Updated: Mon, Sep 28 2009. 10 03 PM IST
One of the concerns that may affect growth in oil importers such as India is higher crude oil prices. The Asian Development Bank’s (ADB) recent update on its economic outlook for the region lists resurgent oil prices as a risk to its global forecast.
Of course, few expect a runaway rise in oil prices, but the ADB report says that “even if, as is more likely, oil prices remain flat or rise only slowly, they may combine with strengthening aggregate demand and loose monetary conditions to lay the foundation for another bout of inflation. That is, higher oil prices can contribute to inflation pressures in an overall environment that is conducive for a revival of inflation”.
The report says there are two reasons why oil prices will not surge in the short term. One, the recovery in industrialized nations is still fragile and two, high inventory levels are likely to persist in the immediate future. ADB says that global oil demand will most probably fall by around 2 million barrels per day (bpd) this year. And with all those reports of oil being stored in tankers, there is enough stock available to meet the modest rise in demand that will be the result of a sluggish recovery. In short, on the demand side, it would take an improbably robust global recovery to make a significant dent in inventories.
What’s interesting is that ADB believes that an upsurge in oil prices is also unlikely in the medium term. That’s because the production capacity of Opec (Organization of Petroleum Exporting Countries) is expected to rise substantially by around 2 million bpd during 2008-11. “This increase translates into higher spare capacity that will damp the scope for price increases, even in the face of rising demand from the PRC (People’s Republic of China) and India, until around the middle of next decade.” Non-Opec production capacity will also increase. Production from non-Opec oilfields, which fell by 400,000 bpd in 2008, is expected to rise by a similar amount this year.
Non-Opec output capacity will also increase till 2012, with new fields in the Gulf of Mexico and Brazil coming on stream. all this should be good news for India.
Of course, ADB sounds a warning that, from the middle of the next decade, price pressures will once again be seen in the oil market. Much will also depend on the value of the dollar—the recent rise in oil prices was the result of the plummeting dollar. As for inflationary pressures, ADB says the “governments should also continue to phase out costly fuel subsidies and, more generally, encourage more efficient use of oil before the next big surge of oil prices arrives”.
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First Published: Mon, Sep 28 2009. 10 03 PM IST