The Hindu Business Line : ‘Oil prices will come down in the short run’

Mumbai, July 2 Oil prices will come down in the short run but will continue to rise steeply in the long run, said a research report by international rating agency Standard and Poor’s.

Total world energy consumption was 2.4 per cent in 2007, a slight slowdown from 2.7 per cent in 2006 but still an above average increase. While oil supply is finite, the increasing demand for oil due to the greater demand from Asia’s growing economies is pulling the prices up. This mismatch in demand and supply is further exacerbated because nationalized oil companies across the world have less incentive to raise production.

Despite oil touching $143/barrel there is no significant decline in its usage or a build up in inventories. Compared to the developed countries, energy demand is increasing at a much faster pace in Asia, excluding Japan. While Asia-Pacific’s energy demand increased by 3 per cent, US and Western European oil demand increased only by 1.8 per cent and 0.4 per cent respectively in the period 2002-2005, it said.

India and other developing Asian economies are plagued with problems of inefficient energy usage compounded by the fact that they subsidise energy consumption by controlling electricity and gasoline prices. But these nations do have an advantage on depending more on coal and less on oil. The report predicts that these economies will gradually phase out subsidies in the face of rising import bills and lower energy efficiency.

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