The inevitable has finally happened. Oil, late on Wednesday, crossed the psychological barrier of $100 per barrel internationally. In inflation-adjusted terms, this roughly matches the earlier highs touched in 1979-80. The immediate trigger for the spike was the violence in Nigeria and fears of supply disruptions, though turbulence in the vast region from Pakistan to the Middle East was also cited as a worry factor by global analysts, many of whom have Houston oil researcher Matt Simmons? ?peak oil? warnings?and suggestions of unreliable umpiring on Opec reserves?at the back of their minds. Short disruptions are a risk the market has got accustomed to. The longer term worry is that oil production is nearing a ?peak? it might never achieve again. With surging demand from China and India having already stretched existing supplies to their limits, the future could see a price spiral worse than experienced so far. Data on Opec reserves is said to be dodgy because the cartel operates on a quota system that incentivises each member to overstate its barrel count under the ground. Opec, scheduled to meet on February 1, may opt for an increase in output. But it does not have enough spare capacity to make much of a difference. This, together with the reality of a fast emerging Asia, spells uncertainty for the global demand-supply scenario. Oil price speculation is rife. Several funds which have taken huge positions in crude oil, some as a hedge against a weakening dollar, are in no mood to liquidate their bets?an indication of what they expect.
A consolation for economic analysts is that the US economy seems to have lost its earlier vulnerability to oil price spikes. Yet, the US may be headed for a slowdown on account of excesses and adjustment deferrals associated with its subprime credit crisis, and higher oil prices might tip that country?s economy into recession. Expect India and China to come under pressure to pass on the burdens of their oil import bills to their motorists. Subsidies in these two countries, say analysts, have distorted the entire market; can they afford to sustain such policies without a way to square the circle? Issuing international oil bonds has been suggested. Still, the cost will eventually have to be borne. To make the adjustments easier, a hike in domestic petroleum prices is needed urgently.
