How oil prices are wrecking the economy

In India, the demand for crude oil is rising by 7 per cent, while imports are rising by over 9 per cent. So, okay, oil prices have doubled in just over a year. Here's why:

Speculative trading
Traders bet on future prices of oil through commodity exchanges. If there is a natural calamity, or if a country's president or the boss of a global oil company makes a statement which could be linked to oil, the traders at the exchanges bet on a higher price in the future.

The record high price of nearly $147 per barrel.

Geo-political tensions, leading to supply disruptions

Caused by war, terrorist attacks or military warfare in oil rich countries, which could affect oil supply. The US sanctions on Libya, Iran and the war in Iraq have all affected oil prices

Blame it on shining India...
...and China and West Asia, where rising demand (at around 8 per cent from around 7 per cent a couple of years ago) is creating inequities between supply and demand

Controlled production by OPEC

The cartel of the world's largest oil exporters called the Organization of Petroleum Exporting Countries, accounts for two-thirds of the world's oil reserves but only 40 per cent of world production. OPEC does not want the market to be oversupplied as it would bring down prices. High prices suit the oil producing countries

The dollar dunnit

That's right, as the dollar weakens and other currencies harden, crude oil prices, which are traded in dollar terms, move to compensate changes in dollar value.

In India, here's where we are placed...

· This century is being marketed as one of natural gas. Gas, found with oil, was previously burned. Governments and companies across the world are now tapping the huge gas resources to fuel their economies. Gas is less than half the price of oil

· India's languishing hope for a nuclear deal with the US could boost nuclear power generation

· Many companies, including India's Suzlon, are going big on wind energy. Suzlon is developing Asia's largest wind park at Dhule, Maharashtra

· Companies like Reliance are betting on solar power. Reliance is setting up a 10 Mw solar power plant in West Bengal. It is also planning to adopt a village in Maharashtra to be lit by power generated from the sun's energy

· Tata and Reliance want to convert coal into oil. The technology is still in the initial stages. India has one of the world's largest reserves of coal

· Exploit gas reserves from crystalline rocks on sea beds - called gas hydrates. The technology is still being developed. Other than India, tests have been conducted only by the US and Japan. The reserves of natural gas locked up in these rocks are believed to be multiple times larger than the world's total gas reserves

Here's why we in India should be worried

India guzzles...

· 3.01 million barrels per day of crude oil

· 2.58 million barrels of petroleum products

But produces only

· 700,000 barrels of crude oil per day (23 per cent of its consumption). Demand for crude oil is rising by 7 per cent, while imports are rising by over 9 per cent. With rising prices, the import bill is ballooning, leading to a strain on government finances

But will oil prices come down any time soon?

· Russian company Gazprom, which supplies a quarter of Europe's natural gas, predicts oil prices, currently already very steep at $135 per barrel ($76 per barrel in 2006-07), will be $250 per barrel in 2009

· Goldman Sachs has projected that oil prices could rise to $200 per barrel by the end of 2009

· In fact, Morgan Stanley sees oil prices at $150 per barrel in the next three weeks

· And closer home, the Oil and Natural Gas Corporation says three-digit oil prices are here to stay, so you might as well get used to emptying out your wallet at the gas station

If Goldman Sachs is proved right (oh-oh!):

It means the prognosis for us in India is...

· Unsubsidised petrol and diesel could cost over Rs 100 per litre in India

· Growth may slow to much lower than the current 8 per cent

· Inflation may rise to over 16 per cent

· All of India's oil companies may become sick if prices continue to be subsidised

· And the world economy may slide into recession

And some more interesting facts

· China, India, Russia and West Asia oil demand: 20.67 million barrels per day

· US oil demand: 20.38 million barrels per day

· China oil consumption: 7.89 million barrels per day

· 2.45 billion people in China and India used only half as much crude as 301 million people in the US

· In India, energy use is less than 10 per cent of America's on a per-capita basis
The International Energy Agency says.

· The world's energy needs would be well over 50 per cent higher in 2030 than today

· China and India would together account for 45 per cent of the increase in global primary energy demand

Drastic measures

Or you might call them innovations!

· India's southern railways is using cooking oil to power trains. The railways collect used oil from hotels and restaurants in Chennai and put it through a process called trans-esterification. The project is already a proven success

· Some companies like cement-maker ACC are looking to use expired consumer products like shampoo, soap and paint sludge in their furnaces. However, this may only replace a very small quantity of the company's fuel requirements