Politics over price rise

Oil prices have now become the single-biggest issue facing the global economy. It has not only affected the United States politics, but also its economy, which is now witnessing a record trade deficit. The pinch is also being felt in India as the politics of economics is staring at the Congress-led UPA government, which despite having averaged a 9-plus per cent growth for three consecutive years, has been robbed of the dividends due to spiralling inflation.
Towards energy security, a serious mood change is being witnessed in the US, as John McCain has suggested a revival of the US nuclear programme, while the Governor of Florida is talking of re-examining the ban on offshore drilling. Since the US’ bill for foreign crude oil soared to an all-time high, America’s trade deficit jumped to the highest level in 13 months in April. The reports are that the gap between what the nation imports and what it sells abroad rose by 7.8 percent to USD 60.9 billion, the largest imbalance since March 2007. The growing deficit was driven by a USD 4.3 billion increase in crude oil imports, as the average per barrel price rose to an all-time high.

The politically sensitive deficit with China reflects higher imports of a wide range of Chinese products. The US is also having trade deficit with Canada, Mexico, and an imbalance with the European Union, besides an all time high deficit with the Organization of Petroleum Exporting Countries.

Many economists are looking for the deficit to shrink as a sharp economic slowdown in the US cuts into consumer demand for imports and the weak dollar helps to boost its exports. The Bush administration has switched signals after tacitly accepting the decline in the dollar for years to help boost the exports. The officials are now talking about the need for a stronger dollar, a reflection of the pain being inflicted on Americans by high gasoline prices. While a weak dollar makes US exports more competitive on overseas markets, oil producers demand higher prices for crude oil, which is priced in dollars.

Skyrocketing energy costs have fueled fresh interest in the four-day workweek across the US as a means to help workers as well as employers cope with the surge. In Birmingham, Alabama, city officials decided to implement a four-day week starting July 1. The compressed four-day week is among many options being used by employees and employers in the US, including telecommuting and carpooling, to keep transportation costs down.

All the major Asian consumers of oil -India, Indonesia, Malaysia, Taiwan and now even China, have hiked retail prices by 12-40 per cent. The high oil prices are justified not on the basis of current shortages, but on the expected sustained growth in future demand. If the major Asian nations, which account for all the incremental demand growth today, appear to be on a path to remove subsidies and force energy efficiency.

Amidst this scenario, the Indian government- despite having an average of 9-plus per cent growth for three consecutive years is in a fix as the general elections are round the corner. The rising inflation has robed it of the dividends of growth. In an interview, Finance Minister P Chidambaram elaborated the situation, “There is no sign of oil prices abating. There is no light at the end of the tunnel yet because crude oil prices are still rising and today they have crossed USD 140 per barrel.”

It’s not only Indian government, which is in the vexed web of inflation, but also the countries like Spain, Russia, Indonesia, Pakistan, Argentina, Egypt and South Africa are confronting the rising prices. For the first time, all prices have got linked to crude prices. Food prices have got linked to oil prices because of bio-fuels and commodity prices have got linked to oil prices. The UPA government in India has in vein used every tried and tested methods e.g., monetary curbs, export curbs on essential items like cement, and the suspension of futures trading in staple foods such as rice and wheat. But there seems to be no immediate solution before it, therefore the Congress dubbed inflation as a global phenomenon.

In Philippines, surging food prices have pushed the inflation rate to 9.6 percent, the highest level since 1999. While in Indonesia, oil troubles are posing a growing challenge to President Susilo Bambang Yudhoyono`s ability to maintain economic stability. Indonesia, like its neighbors Malaysia and Thailand, subsidizes fuel to keep it affordable for its citizens. After the Asian financial crisis of 1997 and 1998, the International Monetary Fund compelled it to start cutting those subsidies to reduce the burden on the government`s budget. All three countries are now trying to cut those subsidies to reduce the burden they place on their budgets, thereby passing along higher oil prices to consumers.

In other parts of the world, Spain witnessed truckers’ strike in protest of rapidly rising fuel prices. The truckers blocked principal routes into major cities around Spain.

Mounting price pressures and the growing number of protests and demonstrations in developing and developed countries around the world has led Saudi Arabia`s cabinet to call for an international meeting of oil producers and consumers. Saudi Arabia appears to be gradually realising that the scenario would seriously damage its own long-term prospects by letting oil prices get out of hand. The call for a meeting of producers and consumers, which, even though not successful, underlines its growing sensitivity to global calls to stop this parabolic rise in oil prices. The Saudis appears to be afraid of serious policy action in the major oil-consuming countries designed to reduce dependence on imported oil. The rise in prices from USD 70 to near USD 140 a barrel will alone transfer in excess of USD 2 trillion from oil consumers to producers.

There is no doubt that global oil production - at about 87 million barrels a day - is sputtering. Or there is simply not enough oil left in the ground? Or is it because of investment in new fields and production? It is a fact that some of the world`s biggest oil areas are being depleted rapidly. The world`s largest oilfield at Ghawar in Saudi Arabia, which produces more than 6% of global production, is thought to be in decline. Many big oil producer countries, including Venezuela, Russia and Iran, are stagnating because they are not investing enough. But there are other areas, such as the Santos Basin off Brazil, which are just opening up.

The International Energy Agency believes that massive investment will be required, especially in the Middle East, to meet soaring global demand. It claims that “conventional” oil will provide at most about 92 million barrels a day. But tens of millions more barrels a day could come from “unconventional” sources, such as oil sands, shale oil and Arctic oil, as well as liquid fuels, which would bail the world out of this oil crisis.