Oil prices are now too high for everyone, said the International Energy Agency chief Nobuo Tanaka, on Monday. At the same venue—the International energy forum meet at Rome—the spokesperson of oil supplying cartel Opec rejected calls to raise output and ease the pressure on prices—that hit $118 a barrel on Tuesday in the wake of supply disruptions.
Opec claimed there was no shortage of oil in the market and blamed the weak dollar and speculators, instead.
It is true that the weak dollar trend has made dollar-denominated commodities such as oil highly attractive to hedge funds and other investors, who have bought huge and growing volumes of oil contracts for more than two years now. In other words, much can be blamed on the financial crisis in the US economy. But that’s not the whole story, as we know.
Even if Opec says there’s no need to raise output now, the chances are it is watching how much it can push the envelope to gain from the price spiral without toppling the global economy, much of which may be on the verge of hitting recession. When push comes to shove, it may act.
But, and this is key to the oil market dynamics, swing, or spare, capacity is woefully low today. Thus, while agreeing with the dollar and speculative factors, Tanaka pointed to the fundamentals—demand outpacing capacity to supply, with most of the demand growth coming from emerging economies—largely China, India trailing behind a bit.
And that’s how it will be for years to come. Even as high oil prices are attracting investors to explore and extract oil from new areas, these are mainly tougher and costlier to extract reserves—including the new large finds off Brazil’s shores.
Either way, an upward pressure on prices will sustain. And expanding consumers like us need to—for our own sake—focus in mission mode on rational use and conservation. The transportation sector absorbs around 40% of our oil consumption—there’s a lot to do here. The government has a big role even beyond correcting fuel price signals. It needs a cohesive stance—from tax signals for fuel-efficient vehicles to sharply reducing traffic congestion. Just note the serpentine queues of trucks waiting at toll gates, burning away precious fuel, for example.
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