Greasy affair – Oil prices and economies


I try my best to understand international affairs, economics and foreign policies but sometimes I simply don’t get it. Are policies formed and strategies built to make life easier for people or what?

Take a look at the latest global oil crisis. Oil prices are at an all time high. People all over the world are suffering (except probably the people in OPEC). Within and amongst countries the blame game is on about increasing demand, falling supply, declining production initiatives, and so on.

Saudi Arabia (which is the largest producer) says it will increase the production to meet higher demand; US blames its oil companies for making windfall profits and still not doing anything about the prices; the companies in turn say they are reinvesting the profits for exploration. Meanwhile US imports of oil have risen to 65% of its total consumption (witness yet another George Bush-ism – “It is clear our nation is reliant upon big foreign oil. More and more of our imports come from overseas”)J ; India, China and other developing countries are being pointed at for their outrageously (!) high quantities of oil consumption; suddenly press and people of the developed nations are accusing Governments for not being concerned about developing other sources of energy.

Interestingly, the story in India goes like this – In spite of the record oil prices abroad, Indian oil companies in the public sector are on the verge of bankruptcy. The Government decides to subsidize fuel prices, which means that the petrol sold by the likes of IOL and BP in India, is much cheaper than the petrol sold by Chevron in the US; meaning, IOL makes a loss every time it sells fuel to the Indian public.

When oil prices went up further, the Government had no choice but to hike the prices by an average of 13% at one go which came under sharp protests by the Opposition. Between soaring prices and subsidies from PSUs, the private players like Reliance are having a tough time too because if they don’t lower prices, they remain uncompetitive. With oil prices still soaring, the Government’s lack of nerve (in view of coming elections) to remove subsidies, the PSU oil companies road to bankruptcy and the private players not able to do anything, there is no doubt that the economy is in turmoil. Rate of inflation will soar, stock markets will suffer and the dream run part II of the sensex will become more and more elusive.

All said and done, the fact still remains that there is no short term solution for high oil prices and at least 90% of the world’s population is suffering from it. Given this, I can’t help wondering, “Why can’t we just lower the prices? I mean, what’s the big deal? If everyone faces the problem, nobody would not want to see the prices go down, right? So let’s just bring them down!”

Alas, if only it were that simple.

When such crises occur, I think Governments everywhere can(rather, should) learn some lessons – about making compromises, about understanding the importance of being interdependent, about reminding them that they are representatives of a large population and that there needs to be a human aspect to everything.


2 thoughts on “Greasy affair – Oil prices and economies

  1. Very very interesting observations… but then, just think about it… if prices have to go up, demand has to go up and/or supply has to be disrupted. If you look at it, do we see a drastic spike in the demand of fossil fuel… its been growing of course; but plot the price of crude over the last year vs. the increase in demand in maybe a basket of countries, findings ought to be very interesting. I’ll put my money on that it will not be correlating at all with each other… The increase in demand will be steady and gradual where as we see upward spikes of prices, which lowers only to a lesser extend than the demand…
    But then there has to be a reason for this? Futures? Sentiment based trading? Partly this might be to blame. For example, oil prices went up by 3% 2 weeks back based on fears that there could be problems in Nigeria and the supplies might be disrupted; all before a shot was fired or an ammunition moved. Again, if its sentiments, then there has to be the other side as well, when the sentiments that push up the prices are found to be wrong. Then the prices have to come down, right??? Why does’nt come down then? I dont have answers for that… I’m as stumped as everyone else are. But then, its not that easy for a single govt. to control the issue by themselves. the only thing they can do correctly is to avoid populist measures and go by basic economics – Pay actuals for what is consumed. Within that they can always bring in subsidy for the needy, i guess.

  2. Manu, thanks for expressing your thoughts.

    Supply and Demand are certainly the primary factors affecting price of any product.
    I think the simplest explanation for the latest price rise has been that both supply is decreasing and demand is rising. On the supply side, the Iraq war, Venezuela’s oil strike and decrease in US oil ridges.
    On the demand side, though like you mentioned increase may have been steady, what most people are probably pointing out when they say that developing nations’ demand has risen is that, since dollar is weakening, developing countries have comaparatively more money, their purchasing power is increasing, even psychologically there is the feeling that they are doing better, which might have developed their want and accesibility to automobiles, generators and other oil dependant products.

    About the sentiments, i think in this world and in this business, negative sentiments stay longer, or people/lobbyists make sure that they stay longer, they speculate.

    I guess, in certain cases Governments of individual nations get totally helpless of the situation becuase this is an international issue and they are dependent on the world/ other nations/ groups of other nations.
    Oil companies are obviously capitalising on the fact that oil is a diminishing commodity and people have to pay a premium for its value and risk attached with its future availability.

    In one way, this is kind of a much needed wake up call for us to look at other sources of energy to sustain our needs.

    I found this link, chk out –

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