The Hindu Business Line : Crude drivers

A week ago, crude oil prices hit the headlines by touching a record high of $135 a barrel. It had galloped to the three-figure mark of $100 in early January. Today, crude oil is at least four times as expensive compared to 2002!

A closer look at what is driving crude prices points at an increased demand for energy from countries like China and India.

Demand

India and China, with a billion-plus population, are two of the fastest growing economies of the world, requiring more and more energy for their development needs. A recent New York Times article ( based on a report by International Energy Agency) reveals that over the past two years, China and India accounted for about 70 per cent of the total increase in the world’s energy demand. China is already the second-largest consumer of oil behind the US with demand growing at about 15 per cent every year. China’s and India’s net oil imports are expected to reach 19.1 million barrels a day in 2030 from 5.4 million barrels in 2006, more than what the United States and Japan now import. By 2030, the global oil demand too is expected to reach 116 million barrels a day ( from around 87 million barrels currently).

Given the pressures of economic development on oil, speculating the price of crude oil futures, as a fallout, have also kept the current momentum in oil prices going. In recent times, OPEC has been repeatedly refusing to increase production quotas to ease prices.

The cartel claims that there is enough supply in the market and rise in prices was only the work of speculators. Rather than a rise, it is more concerned about a fall in demand due to slowing economic growth in major economies such as the US. While a surge in demand seems to be the primary reason behind the present rise in prices, a few other factors too contribute to the day to day volatility in oil prices.

OPEC’s role

Producing almost 40 per cent of the world’s crude oil, and holding about 60 per cent of the world’s oil reserves, OPEC (Organisation of Petroleum Exporting Countries) plays a vital role in determining the direction of oil prices.

OPEC fixes production quotas for its members based on the demand-supply scenario and the expected growth rate. Should there be a sudden rise in prices citing shortfall in supply or a fall in prices due to slowed demand, there is a general expectation that OPEC will step in, review quotas and bring in the needed stability. So, any decision by the OPEC contrary to expectations may raise concerns about supply, and hence result in an upward move in prices.

Political instability

Another key driver of oil prices is the political uncertainty in many of the oil-producing countries. A US warning to Iran, for instance, may raise oil prices in the fear that a war in the West Asian region might cut off supplies. Similarly, an internal disturbance or an attack on any oil infrastructure facility — as it has recently been happening in Nigeria (one of the top ten oil producers of the world) may also trigger a panic increase in prices.

Man-made factors notwithstanding, a natural disaster too could have its effect on oil prices. Who can forget Hurricane Katrina that claimed several lives in the US way back in 2005? While America mourned the victims, crude oil quietly crossed the $70 mark as the hurricane brought oil production in the Gulf of Mexico to a grinding halt.

Inventory worries

A lower-than-comfortable oil inventory could prompt countries to buy more oil, creating an unexpected surge in demand. For example, one of the several reasons cited for crude oil crossing the $100 a barrel mark earlier this year, was that US inventory levels were at a three-year low.

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