The Hindu Business Line : Unease in Gulf, Nigeria makes oil, financial markets jittery

The debate is if the $50 a barrel price can be sustained indefinitely or if and when oil markets can return to "normal" bracket below $40 mark. As the Western oil markets enter a period of high winter demand (October to February) latest figures indicate that the US inventories are at a record 25 years low.

Benchmark US oil crude last night featured at $49 plus mark and the British Brent crude is hovering at above $45 mark for November deliveries.

Nigeria, which is a high-grade crude oil supplier to the US and China, is currently passing through a phase of politically initiated domestic violence. Although, Nigerian security scenario is not as bad as in Saudi Arabia and Iraq, there is general concern about "spill-over" effect of Al-Qaeda initiated acts of terrorism to bloc Western oil supplies.

The spill-over effect could be felt in other Islamic oil producing countries, although security clamp down in North African and Gulf region is rated as "tight and secured."

The domestic US oil production has been disrupted by the hurricane season this year but this could be a "passing but not a permanent" phase. Hence it is argued that current low inventory oil pitch in US may mean further boost in production costs as the global oil output nears maximum capacity with rising demand from China, and it remains to be seen when China's voracious oil thirst can be quenched.

The world's oil refining system, which converts crude oil into usual and useable products as petrol for auto engines, diesel fuel and heating oil has also reached its maximum capacity.

China is busy scouting for fresh oil refining acquisitions and its latest purchase of a South Korean oil company has raised some eyebrows. The consistent instability in West Asia and the West African region have prompted oil markets to fret nervously and there is much speculation about the long-term impact of high oil prices on global economy.

Managing with low inventories: Oil prices declined recently but for wrong reasons as some commentators have argued that there was a slowdown in global economic expansion and hence oil prices narrowed on a faltering demand. But, this is a controversial and debatable perception. With low economic expansion on horizon major economies could get by on low inventories in the US and Western Europe and it remains to be seen how emerging economies - China, India, Russia and Eastern Europe - respond to this challenge. Above all, how consumer markets in emerging economies respond to rising petrol and oil prices.

For example, 70 per cent of India's oil demand is met by foreign imports, which currently account for a quarter of India's total imports. India's domestic crude has stagnated at 32-33 million tonnes. India imported 90.83 million tonnes of oil in 2003-04 for around Rs 84,000 crore.

In September, OPEC - which has 78 per cent of proven global oil reserves - refused to consider India's plea for lower crude oil prices. According to analysts, OPEC may signal "unease" with rising oil prices but how and when - this is the moot question.

In the world market of some 82 million barrels a day OPEC cartel - with exclusion of Iraq - produced 27.5 million barrels a day of oil in August. OPEC's clout could decline with new oil finds and deployment of "alternative" energy sources.

But this may not be possible for another two or three decades and hence for a while oil consumers have to live with the albatross of high oil prices. The silver lining is that Indian industry's dependence on oil is only 15 per cent and a substantial portion - over 75 per cent is met by coal but oil still moves Indian cars, trucks, tractors, airplanes and railways.