The global oil economy is getting some much-needed respite. Oil prices have cooled a good 16% from the $147-per-barrel level just two weeks ago.
Curiously, the relief seems to coincide with the US Senate considering curbs in the futures business in oil trading. The move seeks to lighten the burden on US consumers’ pockets. A Bill with provisions to this effect may be passed before the month ends.
Illustration: Jayachandran / Mint.
Whether or not that happens depends on a raging debate in the US: What is driving oil prices — speculation or fundamental demand-supply gaps? A recent report by the US commodities trading regulator has said it didn’t find evidence that speculative activity and a higher number of futures traders had systematically affected oil prices.
Not all large oil importers agree. Back home, finance minister P. Chidambaram emphasized just last week that oil prices spiralled beyond the $60-per-barrel level due to speculation, and suggested a reasonable price band in which trading should be allowed.
The fact, however, remains that even as curbs on speculation are being evaluated, demand has been seen to weaken as well. US petrol demand fell 3.3% last week in a consecutive 13-week decline, and oil prices fell both in spot and futures markets.
Another indicator that demand is under constraint now is that US oil inventories fell less than expected — and refineries ran at lower capacity.
With global economy reeling under high commodity price inflation, at least for some time, global demand for oil is likely to be constrained — in fact, a new Lehman Brothers’ forecast says oil price would be down to $90 in the first three months of 2009.
What all this boils down to is that global oil prices seem set for a tempered phase in the short term. This could be a result of several factors — the US proposal talking down the markets, large funds chasing markets other than oil trade and the dampening of demand globally.
For India, these developments have policy implications. It would be much easier for both the government and the consumer if our retail fuel prices are raised in a calibrated, incremental process. Regular revisions will protect consumers from sudden spikes and help them plan how to rationalize consumption. We should have been doing that, especially since late last year when oil prices were still well under $100. Here’s another chance to prepare for market-aligned prices, which is a must for the economy for reasons well known.
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