It should be taken into account that the past three recessions were brought about by oil price shocks

 Oct 10 - 16, 2005

The world of today, its technological progress, industrial development and economic prosperity seems to find its spirit and ultimate being in the till now relatively cheap source of energy, oil. So will these record high oil prices bring the world economy to its knees and usher a world wide recession or like before, will this oil bubble burst and the prices again stabilize?

Although the oil rich Gulf countries might be finding this oil bonanza as a God's miracle but the rest of the world is severely rethinking their economic and energy policies as the high oil prices continue to eat away chunks of their GDP growth. It should be taken into account that the past three recessions were brought about by oil price shocks, although at that time the specter of high oil prices eventually vanished but this time it is widely believed that its here to stay; and not only are the high oil prices not going to decline but are actually going to scale new heights (100$ a barrel?)

The reason why this oil price hike is no mere bubble is that while the past oil price hikes were due to supply shocks which eventually stabilized but this time it's the un-quenching and growing thirst of the emerging industrial giants China and India which have pulled the demand and price of oil upwards. Thus if these economies keep growing at the same or some modest rate then we can expect the prices to rise further. Some might argue that these growing economies will eventually cool down due to high energy cost and thus the demand for oil might fall. However, it should be understood that oil in many economies like USA and China is subsidized thus their industrial sector is not going to bear the full brunt of the high oil prices; consumers in USA nearly pay half the price for oil as compared to their counterparts in Europe. Moreover the growth in these emerging economies is rather long term, in the form of increased investments in long term projects like telecommunications, auto sector and a range of other industrial outputs. Therefore it's highly unlikely that demand for oil will not rise let alone fall.

These high oil prices have led to windfall profits for the oil producing countries and have buoyed up economic growth of the oil exporting countries like Saudi Arabia, however, the rest of the world's economic growth has been severely jeopardized. Pakistan which saw phenomenal GDP growth rate of 8% in 2004 has already scaled down this year growth from 7% to 6% for this year due to high energy cost. Likewise in Europe the rising oil prices mean that the chances of any economic recovery in countries like France and Germany seems highly unlikely.

Thus taking in view the current world scenario, every oil importing country is either looking at alternative sources of fuel or trying to lay hand on as many oil and gas supplies as possible. European countries like England and Germany are leading the race for renewable energies like wind, solar and wave energy and have dramatically increased there investments in these sectors. Unlike Europe the rest of the world is trying to secure as must oil supplies as possible. A quest for oil has started between the two largest oil guzzlers China and USA. While USA is pinning hopes on the gulf countries to meet its future oil demand, China on the other hand seems to be more interested in the central Asian countries especially Kazakhstan, dubbed as the "Kuwait of central Asia", which is to become one of the leading oil producers of the world thanks to the discovery of the huge Kashagan oil field on its Caspian Sea coast in 2000. The recent succesful bid of $4.2billion for the acquisition of PetroKazakhstan Inc., a Canada-based company, by a unit of China National Petroleum Corp. is being seen by China as major achievement after the unsuccesfull bid on UNOCAL after opposition from US politicians.

The bid on Unocal and its rejection on political grounds just shows how serious a rift is developing between USA and China on oil, which is also evident in the recent overtures by China in central asia to counter the presence of US forces. Therefore this is leading to polarization of the world, with US bolstering up India to counter the Chinese threat. Thus this polarization on the lines of the cold war presents dire consequences for the long run. Thus a future showdown between US and China on ideological, economic or political grounds will be fueled by their lust for oil. Thus in this grim scenario it is quest for the renewable energies and not oil which will be beneficial in the long run for the world.