The Hindu Business Line : Will oil touch $200 a barrel?

There is at least one crisis signal that should cause concern — the rise in crude prices has come at a time when the world economy is slowing down somewhat. Tackling a structural problem like this can be challenging.

Ranabir Ray Choudhury

Last year, the crude price was half of what it is now. Will the price then be double of what it is today a year from now? Maybe not, but what is important is that there are people who have predicted that the $200 a level is not unattainable. The argument for this is that the sectoral demand-supply mechanics will not be responsible for the price explosion but the hot-money flows into commodity markets.

Indeed, if one wants to, a parallel can be drawn with what is happening in the domestic economy, specially if one considers the steep fall which has affected the stock market. Here too, the sharp drop from around the 20,000 Sensex level to around 17,000 in the space of a few months does not have a comprehensible counterpart in the real indices for the national economy. The only definite indentifiable reason behind the market movement has been the withdrawal of funds from the market, which has been attributed to more than one reason.

Crisis signals

In other words, the play of funds in the domestic stock market has been the principal reason behind the sharp decline in the Sensex. Similarly, the market has also been held responsible (by at least one section of analysts) for the sharp rise in crude prices.

Among other things, it has been said that the falling dollar and the turmoil in the world’s equity markets have been responsible for a huge inflow of funds into the commodity markets, including crude.

What one can infer from this is that, among other things, with the development of the international economy over the decades, the speculative influences have also strengthened, so much so that they are now in a position to influence certain sections of the economic scenario (both at the domestic and international levels) in such a way as to raise the cry of global crisis and alarm.

Crude problem

Even though the basic impulse of the rise in crude prices can probably be traced to the flow of hot-money into the world’s commodity markets (which pushes the crude demand-scenario into the background of discussion), there is at least one crisis signal that should cause concern, namely, the rise in crude prices has come at a time when the world economy is slowing down somewhat.

Rising prices (within limits) along with rapid economic growth is understandable; but when prices rise when there is a slowdown, it usually means that structural factors are involved, such as, say, rising costs which could be the result of a myriad reasons. Tackling a structural problem is, at any time, a more challenging task than dousing inflation spurred by, say, rising demand.

Seen from this perspective, it is easy to understand OPEC’s stance that there is no shortage of crude supply which has led to the price rise. In fact, the organisation has gone out of its way to make the point — no doubt because of pressure from its friends principally in the industrialised world — that if the crude price continues to rise, it may review the production structure and amend the present supply arrangements within the bloc.

According to one view, any increase in output less than 500,000 barrels a day will not be able to influence the current price trend which, among other things, suggests that the “hot money peddlers” really have the international economy by its throat.

High-price regime

There is, of course, the well-known view that the long-term crude supply scenario is heading towards a high-price regime because of the strategic imbalance between supply and demand, with output falling behind the growing needs of the world economy with time.

Perhaps this view has coloured the investment decision of the market investors who know it in their bones that while everything else may rise or fall, crude will always rise in the long run.

What this means is that, in times of uncertainly, invest in the crude market, which will not only keep one’s money safe but will also make it grow over time. If, in the process, the international crude price goes up, upsetting the economies of a whole host of countries belonging to both the rich and poor worlds, the market players are least bothered because, at the end of the day, their pot of gold will be waiting for them.

Alternative options

So how does one tackle the crude price increase resulting from commodity operations? Clearly, the surest way to get positive results is to increase the opportunity cost of investing in the crude market, meaning that alternative, more attractive, avenues should be opened up where the market players can dump their funds.

But this is easier said than done because such investment opportunities are not tailor-made and depend on a host of factors affecting domestic economic policies and global issues.

Take the investment conditions in major international stock markets which, normally, is the haven for a large portion of the world’s hot-money. When these markets begin to go down, the hot-money flows out and seeks safer and more stable repositories — in this case the commodities market, particularly crude.

When the stock markets are ‘healthy’, meaning yielding handsome returns to investors, there is no need to do so, the implication being that markets such as commodities are not overly disturbed. So how does one make sure that the world’s stock markets are stable — and rewarding to the big players who control the floating funds?

Disturbing element

If one could answer this question, one would have laid hands on the key to handling effectively the most important “disturbing element” as it were in the way of the smooth working of economies, both at the national and global levels.

In the case of New Delhi, it would be nothing short of the discovery of the golden wand so to speak, given the problems which the recent gyrations of the stock market have resulted in for the managers of the economy.

But, of course, as the world knows, this is an almost impossible task to perform, specially in view of the fact that a freely-operating stock market (guided by a helpful and liberal regulator) is the very basis of a liberalised economic set-up.

What, then, does this mean for the $200 a barrel crude scenario? Briefly, it may materialise because its basis, as indicated above, is governed by the principle of expectations which itself is based on the prop of uncertainty.

But it may take some time because of the defensive mechanism which the big economic players have already triggered, which will have the effect of pushing back the inevitable — maybe till after the end of the present decade.

More Stories on : Petroleum | Economy | Wide Canvas

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
English demands inclusive growth!

Trading palliatives

Silly season in full swing

Kudos in line on inflation management

Will oil touch $200 a barrel?

The Chinese turn on their nationalism

Rurbanisation is solution

Pricing by persuasion