BW Communities

Sticky Global Growth

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Oil prices, it seems, are not going to come down in a hurry. The 8 July meeting of the ministers of the Organisation of Petroleum Exporting Countries (Opec) ended without any agreement to raise its current production levels that would raise the global output from 28.8 million barrels a day (mbd) to 30.3 mbd. Brent crude has been trading above $110 a barrel for several weeks now (and West Texas Intermediate, the US version, trades at $100 on the New York Mercantile Exchange or NYMEX). Saudi Arabia and the Gulf countries - Kuwait, Qatar and the UAE - were pushing for an increase of 1.5 million barrels a day, but the other six members of Opec, led by Iran, vetoed the idea. Saudi oil minister Ali Naimi called it the worst Opec meeting he had attended, and left the meeting saying that his country and its Gulf neighbours would go ahead and increase production anyway. It has been argued in recent months that the Opec is no longer a cartel. In January 2009, Opec ministers had agreed to cap production quotas at 24.9 mbd (till 2007, quotas were set country by country, the last time being October 2007). But that limit has never been adhered to. A review of the data from 2004 to 2007 showed total oil production routinely exceeding set quotas; except for perhaps a few months between late 2007 and mid-2008, production quotas have been routinely violated. According to secret cables between the US State Department and Saudi Arabia in 2008 that were made public by Wikileaks, the Saudis had agreed to raise production to help manage the crisis. So what's keeping oil prices up? Speculation. On 10 June, the Commodities and Futures Exchange Commission (CFTC) presented data that almost nine out of every 10 trades in oil were made by speculators, not end users. In a speech in New York, CFTC chairman Gary Gensler cited 31 May data to show that 12 per cent of all oil contracts were 'long', or for end use; 88 per cent were financial bets by hedge funds and Wall Street banks. The CFTC data also showed that 80 per cent of trades in key markets were either day trades or around contract expiration dates. Gensler and the CFTC are not the only ones putting out such data; according to some analysts, even Opec ministers believe there is a $15-20 risk premium embedded in current oil prices, implying a high degree of speculation. But others believe that growing demand for oil is also a factor, mainly from China and other emerging markets, including India; on 8 June, US Federal Reserve Board chairman Ben Bernanke said in Atlanta that demand is outstripping supply of oil and feeding market volatility. BP's June report suggested that China already has overtaken the US as the world's largest consumer of oil. In April this year, global production was at 28.8 million barrels a day; demand in 2011 is estimated at 29.9 mbd, according to the May 2011 Opec Monthly Oil Market report. So where does that leave the prospects for the Indian economy? Between a rock and a hard place. High oil prices will sooner rather than later have to be passed through to consumers if sanity is to be restored to public finances. But the government also faces extraordinary political opposition on managing inflation by passing through higher oil prices that will push inflation even higher. From being on the horns of a dilemma, the government could get skewered on it. (This story was published in Businessworld Issue Dated 20-06-2011)