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Posts Tagged ‘oil’

There are three factors driving crude prices higher.

1. NATO led War against Libya means a major supplier is unable to supply any oil.

2. Nuclear crisis in Japan makes people nervous about future of nuclear energy- especially in earthquake prone regions.

But that’s not all.

3. Production of oil in the US are low. The stockpile (reserve) is at their 25 year low. Keeping in mind US is the biggest oil importer by far, it is natural that oil prices will go up.

Oil is keeping around 120. Hopefully it’ll stay there for some time (a month or so) before starting to climb again. That’s because if it sees a spike, it’ll fall back to 120 if the baseline is established there, and not to 90.

We in the “third world” buy locally grown food, travel in public transport, save on electricity- and that makes our economies much more fuel efficient and robust against rise in oil prices. Only high prices of oil will force the “developed” countries to change their habits and become civilized. Otherwise they’ll blame us when their CO2 causes Bangladesh to sink under the sea.

Secondly, a high price of oil will cause the West’s hegemony to lose grip, iA.

I feel the pinch too, but we should be able to rise above saving a hundred (rupees) or two if that causes the poor to sink under the sea.

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Oil is now selling at $126 a barrel (at London Brent.) If it keeps going too high, leaving moving average (average price of a barrel for the past few days) too far behind, then people will expect price to fall, sooner or later. Sale will slow down, market will be oversupplied- leading to a precipitous fall in prices.

In that light, it is my sincere hope that oil price does not spike upwards, but keeps rising at a steady rate.

Now here is why I am cheering high prices of oil-

1. Oil is undervalued. Like gold, we have only a finite supply of it. Unlike gold, we are using it up at an ever accelerating rate. The price must go up for the consumption to slow down.

2. Burning fossil fuel is one of the leading causes for global warming. High prices of oil will force leading emitters to change their habit. Mere preaching has had no effect so far.

3. High price of oil will level the playing field for developed and developing countries. Developing countries are much more fuel efficient (Widespread public transport etc.) and are much more frugal about spending energy.

The rich countries, on the other hand, have built their system on cheap/stolen oil. As all oversupplied economies do, they are horribly inefficient in terms of energy usage. A high price of oil will  force them to become more energy efficient- something the poor countries have already got.

4. After trillions of new dollars (printed out of thin air as bailout money), the value of the dollar ought to be on the decline.

Etc. etc.

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As oil prices increase (somewhat irreversibly) the price of food in the West are going to go up- for the very simple reason that their farms and delivery system is so oil dependent.

If the food prices rise in the West, there will be more food exports to the West from the countries that produce food for cheaper. Because the Western countries typically have more purchasing power (for the moment), the prices of food are going to go up globally.

It is critical then that the countries that are import-dependent just because imports are cheap must focus on food production in their own countries. They are in for big trouble if they don’t manage that within next one-two years.

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The West is too used to getting oil for cheap (sometimes at a gunpoint.) The true price of oil is not reflected in the price an average user pays at a petrol pump. At around $3/gallon (less than $1/liter), oil is cheaper than coke in the US. No doubt US is intoxicated with oil.

The price is paid by people in oil producing countries. From the Iranians to Egyptians to Venezuelans to Ecuadorians.

The pressure for cheap oil has global implications too. The economy in the US is so transport dependent, that four/five major food producers provide meat for the entire country. Food at any store has on average traveled more than 500 miles. To grow 1 calorie worth of food, US spends more than 10 calories in burnt oil. There is no public transport to speak of. All that add up to make close to one fifth of world’s carbon emissions. Yes- the US alone produces about 20% of world’s carbon emissions. (China  22%/1.4billion, US 19%/.3billion, EU 14%/0.5billion.)

That can not be true forever. It has to change.

I am happy that oil prices are rising because of the ongoing revolutions.

Our economies are far more energy efficient. Food typically comes from the neighboring regions, unless there is a justification for brining them from afar. Eastern economies are much more robust with regards to high oil prices. Europeans are comparatively well off too.

Let us welcome the new era of expensive oil. I hope and wish to see $150/barrel by the year end, and $200-300/barrel in three years (adjusted for inflation.)

Let me also take the opportunity to express my best wishes for my struggling brothers and sisters.

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