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Thursday, Sep 29, 2005

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Volatility may continue in crude oil market

Batuk Gathani

London , Sept. 28

A MAJOR debate in western business and financial circles is now in the offing amid concern about high oil prices. Although the oil price is hovering round $65 a barrel mark (against $70 last month) most analysts have breathed a sigh of relief that hurricane "Rita" along the shoreline of Texas in the US, has caused limited damage.

But analysts said oil suppliers were still tight and the markets may stay "volatile" as the winter heating season begins in October, on both sides of the Atlantic. The Europeans are forecasting a "mild" post-October but there is no real certainty.

According to current estimates, due to the recent "precautionary" oil refinery shut down along the Texan coastline, the lost output would amount to 25 million barrels. Further, oil shortage has been highlighted by damage caused by Hurricane Katrina. This shortage may not have any significant impact on the US economy but any unpredictable and immediate geographical or environment upset could have far-reaching consequences. The western scientists are already cautioning against prospects of many hurricanes and earthquakes — double the number of routine.

Obviously, there is mounting concern in the European business circles about escalating oil prices, with prospects of new finds in politically "tricky" and economically unstable world regions — West and North Africa and parts of west Asian region. Hence, there is an overall quest — highlighted by IMF — to work on strategies for uncertain times.

Other day leaders of Group Seven (world's most prosperous economies) warned against artificial efforts to shield consumers from higher energy costs and stated that this strategy "could backfire".

The leading economic powers of Asia — China, India, Indonesia and Malaysia — have cushioned the effect of rising oil prices to mitigate the effect of rising oil prices on consumers.

In Indonesia, the subsidies cost $1.4 billion and in Malaysia about $1.45 billion. Although India has allowed the retail prices of oil and petrol to "gradually rise" the price-caps have hit the State-run refineries and trading losses have amounted to $3.3 billion in the past 12 months.

China has been more "pragmatic" and has tried to sell surplus refined oil in overseas markets to take advantage of high oil prices in the global market place. This strategy has triggered oil shortage in domestic market place in China but according to western observers the strategy has "political" implications. India imports two thirds of its oil requirements while China only imports about 40 per cent of its energy needs.

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