When, in 2005, Goldman Sachs predicted that crude prices would touch $105 a barrel, the investment bank was attacked for its alarmist projection. There was at the time a firm belief that high oil prices were unsustainable over a long period of time as it invariably slows economic growth?at times, even triggers a recession?and such a situation would automatically reduce demand for oil thereby smothering the price rally. High oil prices, some believed, could also encourage a shift to alternative fuels. But we?ve seen nothing of the sort. The oil rally is now in its sixth year. There is no sign of an economic slowdown, let alone a recession. And the shift to alternative fuels has been patchy at best. On Monday, oil prices set a new high, closing at $88 a barrel, and if experts are to be believed, the $100-level is not far away. There are a few who feel that figure could be breached as early as within the next few months if the ensuing winter in the US and Europe proves unusually cold. With demand continuing to remain firm and very little surplus capacity left in the system, any supply disruption caused by geopolitical tensions (such as a possible Turkish incursion into Kurdish-held northern Iraq) could well hurtle the price of oil into three figures?although profit booking by investors who have poured billions of dollars into oil markets could temper that, eventuality.
What should worry the Indian government in the near term, however, is the low inventory held by major consumers such as the US, China, Japan and Europe. This means oil prices can only go northwards in the foreseeable future. The Indian crude basket has already crossed the $80-mark (against $62.90 in May). The UPA government?s policy of artificially depressing retail prices may serve its political purpose in the short term. But issuing bonds to oil companies for their under-recoveries only postpones the inevitable without forcing consumers to conserve what is increasingly becoming a scarce and expensive commodity. Now that the dust of mid-term polls has settled, it would be far wiser for the government to bite the bullet and raise retail prices, howsoever unpopular it may prove. Or else, the ghost of inaction will return to haunt it when, rather than if, the Goldman Sachs prediction comes true.
