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Will Rising World Crude Oil Prices Fuel Inflation In Volatile Times

Commodities / India Apr 08, 2007 - 10:18 AM GMT

By: Submissions

Commodities Petroleum prices have started racing to $70 a barrel after staying below $60 for the better part of the winter, now coming to an end around the world. What does this portend? Does it signal that the good times are over and recession is about to be triggered in America and a number of advanced countries? The housing boom in the US is beginning to bust and a crisis is looming on the horizon. This has already created a degree of concern, if not alarm, around the world, including India.

How does it affect India and the rest of the world? Because the US dollar value is being eroded and the rupee, yen, euro, Chinese and several other currencies are being valued upwards, there is an implied cushioning of the high petroleum prices, but exporters are losers in cheaper dollars as they earn fewer rupees. The worst affected are the outsourcing companies engaged in providing information technology through service centers as well as call centers, which cover a wide spectrum of the industry.


There is no great relief as there is a downside in the face of America's confrontation with Iran, which is the second largest exporter of oil in the Organization of Petroleum Exporting Countries or OPEC. Iran is displaying its anger by threatening to shut off its oil and gas taps and has already reduced supplies, especially after imposition of U.N. sanctions and threat of increased sanctions.

To India, Iran has already conveyed that the gas available to it is one third of the original offer of massive supplies. The Iran-Pakistan-India gas pipeline project is going into the cold storage for the present, but India is hedging its bets by arranging gas supplies from Central Asia beyond Afghanistan, but that prospect is in the distant rather than near future. India's own oil and gas discoveries, exploration and exploitation are all fairly extensive and intensive, but the demand is outstripping available supplies all the time.

India depends on external energy sources at a very high level of 70 per cent, though oilfields purchased or leased overseas are expected to meet 20 per cent of the needs. The remaining 50 per cent of energy needs, including high quality coal, have to be imported through commercial contracts. India's import bill in the bygone financial year was around $50 billion, but with rising petroleum prices, it could go up by 15 billion in the current year. The energy scenario is very volatile indeed and governed by hawks and they wish to cash in on the limited time they have at their disposal, say until the middle of the 21 st century for oil and gas wells to dry up, though new discoveries in untapped countries as well as the Gulf, could change the picture.

In spite of the rising demand for energy, India is looking for alternative sources, including ethanol from as far afield as Brazil by negotiating leases for huge sugarcane farmlands and setting up refining capacities to produce ethanol and biodiesel and ship it to India. Brazil meets 70 per cent of its energy needs from ethanol and many countries, including the US, are trying to catch up as they have huge farmlands available for use for crops other than grains. India has also increased its imports of palm oil from Indonesia and Malaysia for use as edible oils as well as blending of petrol up to five per cent now, to be raised to 10 per cent in ten years. Within India, efforts to grow jatropha, especially in wastelands as the plant needs little water are in the pipeline on a big scale to blend petrol and diesel. Some farms have already been set up, but the effort deserves a bigger push than is being given at this point of time.

The energy scenario is indeed unpredictable. Countries around the world are trying to build new nuclear power plants for several reasons. The main factor is reducing dependence on fossil fuels, which are highly polluting and becoming scarcer and dearer by the day, with a lot of politics and international factors of war and peace thrown in. France is the largest user of nuclear power, and its technology is believed to have the best available safety factors. Nuclear energy makes up 70 to 80 per cent of its electricity or power generation. The Electricite de France has set up offices in India and its representatives are offering to set up nuclear power plants.

Russia has been at work on two nuclear plants in Tamil Nadu for some decades and those projects may get completed and start functioning within five to seven years. America wants to have a share of the nuclear power plant business and is likely to arrive on the Indian scene after the 123 agreement over peaceful uses of nuclear energy, now in closing stages of negotiation. Enhanced American trade and setting up of projects in India with a population of one billion offers it opportunities to shore up its flagging economy.

America being the largest economy in the world at $12 trillion gross domestic product a year has a strong impact on the global economy. If it prospers, the world gains from it; if it faces difficulties, the rest of world is hit and sneezes, even if not severely, but the economic crisis in the US cannot be overlooked by anyone.

The rise in Indian interest rates has caused enormous anguish among those who have acquired apartments and mortgaged them to banks and other lenders even though no large scale defaults have yet been reported, they will begin to happen at some point of time. If it does, the banks and other institutions financing housing will face problems. The rise in world petroleum prices will ultimately affect retail prices of petrol, gas and other products sooner or later and that will add to the cocktail of woes of Indians and people worldwide. High prices are not easy to absorb for the man in the street or what the Indian political system calls the "aam adami".

Eight years ago five million housing units were being built and sold in the US at an average price of around $200,000 apiece. Continuing rising demand had raised the housing demand there until last year to 6.25 million units a year at an average price of $300,000 apiece. But with the rise in interest rates in the US, borrowers have been unable to make their monthly repayments or what are called repayment in installments of debts plus interest over a number of years, say 20 to 30 years.

After a near boom because of high growth rates in India and China, besides Brazil, Russia and South East Asian countries, the western economies have been able to stave off a slowdown in their economies, but even the continuing boom in a number of developing countries is unable to sustain the production lines of the west as the local demand is beginning to dry up and job losses continue. High prices and reduced incomes when adjusted to rising inflationary trends cause distress. What happens in America and the rest of the world has a cascading effect on India and a number of other countries.

If the Iranian-American confrontation does not translate into war, fears of global recession could perhaps be averted. India is anxious that the two sides should end their war of words and patch up for the good of 7 billion human beings of planet earth and billions more in the animal kingdom in forest and trillions of numbers of fish and creatures in the sea, leave alone the exotic birds who live on trees and fly in the skies.

By DMANews

dmanews@gmail.com


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