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Monday, Aug 09, 2004

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Tight world oil market ahead

Ranabir Ray Choudhury

INTERNATIONAL oil prices are on the ascendant, in fact to such an extent that new records have been set covering periods extending to more than a decade. Thus, at the end of last week, on the New York Mercantile Exchange, the price of crude oil for September delivery touched $44.41, which is the highest level since the exchange started trading in the early eighties. About the same time, in London, Brent crude hit a high of $41.50 a barrel, which too was a record.

Clearly, with crude prices rising by around 30 per cent in the course of the year, there is widespread concern that the international economy is in for a severe jolt. Even so, the panic buttons have not yet been pressed because of the generally buoyant economic conditions in the industrialised economies. But the outlook is not good, which, as things now stand, does not augur well for future stability.

As one commodity expert in London has been quoted as saying, the combined business confidence indicator for the US, Japan and Germany remains near its all-time high. "But it is finely balanced. We are in a situation where spikes are a lot more likely," adding, "What used to be one-off events are no longer one-off, but regular features of this market".

For the poor world, the outlook can only be worse because most of the "leaders" are big oil importers, and rising prices can only lead to massive crude and oil products import bills. This sequence of events has already to play out in India with estimates suggesting that the import figures will far outstrip those for the past year. The Indian situation can be put into proper perspective when it is known that more than 70 per cent of the economy's crude requirements is imported every year, crude oil accounting for more than 90 per cent of the cost of producing petroleum products. To keep costs low, the country relies on a mix of relatively cheap high-sulphur Gulf crude and good quality Brent in the ratio of 55:45.

Even so, the impact of the high world crude prices on the economy cannot be hidden under a bushel for very much longer as is evident from the forecast that the subsidy burden on just LPG and kerosene is expected to shoot past the Rs 10,000- crore mark this year.

This apart, inflation has also begun rearing its head with the latest WPI figures hitting the 7.5 per cent mark for the first time in two years. The bad news is that the latest WPI figures take into the June 15 increase in petroleum product prices and not the July 31 hike. This means the next set of inflation statistics can be even more depressing with serious implications for the economy not to mention the political fallout.

Shifting the focus to the world stage once again, what is the status of the overall supply and demand scenario, which will determine wholly the plight of the international economy in the next few months, including the nature of the heightened pressures on the developing countries? In terms of the macro picture (according to International Energy Agency statistics), global oil demand is expected to increase from 78.9 million barrels a day (mbd) in 2003 to 81.4 mbd in 2004 and to 83.2 mbd in 2005, the respective percentage growth figures for 2004 and 2005 being 3.2 and 2.2.

The rapid pace of demand growth which these figures represent (world oil consumption is said to be increasing at its fastest pace in the last 20 years) is suggested by the fact that in the period 1998 to 2002, the corresponding demand-growth averaged just 765,000 barrels a day, sinking to a low of just 300,000 barrels a d in 2002 (that is, a growth of 0.4 per cent).

What are the specifics of this steep demand-growth? According to the IEA, in 2004 the US and China experienced the "steepest" growth in oil demand with the Chinese increasing their intake by more than a million barrels a day in the first half of this year. For 2005 world economic growth rate has been estimated at around 4 per cent (which is lower than the 5 per cent considered for 2004).

Also, the IEA sees a number of uncertainties surrounding the performance of the Chinese economy with there being a distinct chance of the giant economy slowing down from its scorching pace this year. US economic expansion too is expected to moderate in 2005 "despite an improving labour market and recovering consumer confidence, due to the reversal of tax and interest-rate stimulus measures that helped spur the recent rebound".

What is the overall state of crude supply? To take non-OPEC output first, the latest estimate is that for 2004 it will be 50.11 mbd, to which has to be added the OPEC supply of roughly 27.2 mbd, yielding a total of 77.31 mbd. (OPEC is said to be pumping oil at its highest levels since 1979.) For 2005 the estimated figures are 51.32 mbd (for non-OPEC) and roughly the same 2004 supply for OPEC, which adds up to a marginally higher 78.52 mbd compared to the previous year.

The corresponding demand figures for the respective years being 81.4 mbd and 83.2 mbd, which clearly suggest that the crude market will remain tight and, being so, will be critically dependent on Russian and Saudi Arabian contributions to the global crude system.

As everyone knows, the internal tax problems being faced by Yukos have rendered supply from this premier Russian oil producer at best uncertain. As for Riyadh, there is a growing view that the days of Saudi Arabia being the swing producer of OPEC have in all probability come to an end, all of which goes to underscore the point that the world oil scenario will remain tight in the months (and perhaps years) ahead. In other words, the secular price trend will gradually be a rising one, its progression being punctuated by short troughs triggered by phenomena as mundane as the weather.

For countries like India the message is loud and clear. If the focus on an accelerated economic growth rate is to be given a fair chance of success, the effort being expended on increasing domestic crude production will have to be intensified on a war-footing. The performance till now has been nothing short of pathetic, which is a bit ironic considering that the premier oil producing PSU is among the richest companies in the country.

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