The latest hikes in crude oil prices are causing
worries in importing countries about the economic cost of higher
energy prices. Higher fuel prices are causing higher inflation,
restricting economic growth and affecting purchasing power of
individuals adversely. Major oil exporters are divided into two
groups, one led by Saudi Arabia and Kuwait supporting increase in
output in an attempt to ease prices. Whereas the other group led by
Venezuela is against conciliatory moves towards big consumers.
According to the International Energy Agency,
global economic expansion is the biggest reason behind increase in oil
demand, which is at the highest for 24 years. There is higher than
expected demand in industrialized countries and China's rapidly
expanding economy has created a huge demand boost. According to a BBC
report, the oil demand has risen because of strengthening economic
recovery and greater need for higher grade crude oil suitable for
processing into petrol (gasoline) for the fuel-hungry Sport Utility
Vehicles (SUVs) popular with US drivers. Chinese demand is up 20% over
the past year. Traders are betting this rapid growth will continue for
several years, although there is some chance that the economy will
"overheat" and oil demand growth will slacken.
Oil companies have tried to become more efficient
in recent years and operate with lower stocks of crude oil. Therefore,
there is less of a cushion in the market against supply interruptions.
As against this events such as violence in the Middle East, ethnic
tension in Nigeria and strikes in Venezuela have had a greater effect
on prices in the past year than might have been the case if stock
levels were higher.
The Organization of Petroleum Exporting Countries
(OPEC) accounts for about half of the world's crude oil exports and
attempts to keep prices roughly where it wants them by trimming or
lifting supplies to the market. In the past, OPEC tended to wait for
prices to dip before agreeing to cut output. As against this, now OPEC
is acting more aggressively, announcing production cuts to pre-empt
any weakening in prices. International oil companies traditionally
used times of seasonally weaker demand, when prices were lower, to
rebuild stocks. This option no longer seems to be available.
The combination of OPEC's strategy and low stocks
leave the market exposed to the prospect of sudden price rises if
supplies are threatened. This has not gone unnoticed by professional
market speculators. Hedge funds and other speculators betting on the
possibility of higher prices have themselves exacerbated price
pressure in the market. OPEC officials tend to blame speculators for
2004's run-up in prices, ignoring the organization's earlier role in
preventing stock rebuilding. OPEC argues that its members are now
pumping flat-out — which is largely true — and that it is
powerless in a situation where factors other than mere supply and
demand are at work.
The world's major oil consumers remain dependent on
the Middle East for their oil. Recent violence in Iraq and Saudi
Arabia has again raised fears about interruption in supplies. Iraqi
exports have been cut due to attacks on oil facilities. The reduction
in supplies has been relatively modest but it has caused some doubts
about Iraq's longer term prospects of becoming a large and stable oil
exporter. Attacks on foreign workers in Saudi Arabia have also
increased uneasiness. Any substantial attack on Saudi oil facilities
would be a major event for world oil markets. The country is the
world's biggest oil producer and, by far, the biggest exporter.
Analysts are also of the view that political unrest
in non-Middle East states like Nigeria and Venezuela also has the
potential to disrupt exports and drive oil prices higher. There have
been concerns that a dispute between Russia's government and the
country's biggest oil company, Yukos, could lead to the shutdown of a
good deal of Russia's production. Yukos pumps one fifth of Russia's
approximate 8.5 million barrel a day output but faces bankruptcy
and/or dismantling over huge government demands for taxes.
According to some latest reports, crude oil prices
may touch as high as US$ 100 per barrel in the future, only because
demand is exceeding supplies. In such a scenario the worst hit
countries will be those which are heavily dependent on oil and
Pakistan is no exception. Higher oil price is causing cost-pushed
inflation and adversely affecting purchasing power of people.
Though, Pakistan is rich in coal reserves, its use
as fuel has not become a norm. The effort to use gas for power
generation is also acting as double-edged sword. On the one hand gas
reserves are depleting at a faster pace, on the other hand, rise in
feedstock price has put a cap on addition of new urea production
capacity. The persistent increase in urea price could also adversely
affect yield of food and cash crops.