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Oil prices at stratospheric levels may mean more affluence for crude producing nations, but paradoxically not better living conditions for the population mix.
True, with more resources economies would grow and create booming demand for a number of things.
But, as long as the surging demand is met by imports, the GCC (Gulf Co-operation Council) nations would have to bear the additional cost of the oil spike effect elsewhere and also mark up for inflation caused by the continuing dollar fall.
Oil on October 19 crossed the $90 a barrel mark before retreating, sending shockwaves across the world.
What are the consequences of high crude oil prices?
It may stunt Asia’s growth and stoke inflation.
Countries that operated on oil subsidy schemes such as India, Indonesia and Malaysia are going to face increasing pressure to pass on these higher costs.
A good portion of the current spike is tied to the threat of Turkey attacking Kurds in northern Iraq and could easily come off if tensions ease.
But the Turkey-Iraq risk premium is only a portion of the price rise this year. There is equally a supply worry.
The Organisation of Petroleum Exporting Countries (Opec), while blaming the hike on market speculators, says it would raise output by 500,000 barrels per day from November 1, 2007.
Apart from ongoing geo-political problems in the Middle East and fluctuations in the US dollar, persistent refinery bottlenecks and seasonal maintenance have also continued to push oil price higher.
While the fall of the dollar is hurting the GCC economies, the weakness is providing a hedge against the oil hike to some countries at least.
When a barrel of crude registered $90, the same barrel bought with euro costs around $63. Bought with British pounds, a barrel of crude’s price is $44.
Other currencies have also appreciated against the dollar, giving fast growing countries such as China and India a slight break. China’s yuan has climbed five per cent against the dollar from a year ago; India’s rupee has risen 14 per cent.
The rupee’s climb against the dollar is helping the Indian economy but not the thousands of expatriates roiled by sharply falling exchange rates in the dollar-pegged GCC countries.
The IMF has cautioned that with booming demand and rising import prices, “inflation is accelerating in the GCC.”
Consumer prices on an annual basis have shot up 10.8 per cent this year, after 7.5 per cent in 2006, and are projected to rise 9.2 per cent in 2008.
Saudi Arabia experienced a rise in inflation for the first time in a decade in 2006, with increases also reported in Egypt and Iran.
Airline companies would be forced to add a fuel surcharge to their ticket rates as oil price advances.
This would not only hurt the travellers but also the entire travel and tourism industry.
GCC countries, which subsidise the pump price of petrol, may be forced to either increase the subsidies or raise the retail price of fuel to ensure that oil retailers did not suffer heavy losses.
But perhaps the biggest threat from the latest spike in oil prices is the timing.
It comes at a time when there are worries about the real damage to the financial sector and economy from the sub-prime crisis and credit crunch. And it coincides with a US economy that has slowed and a European one that may be about to join it.
Add all that with higher mortgage prices and higher food costs and it is not hard to see consumers getting squeezed. Some analysts are now predicting oil could go as high as $120 a barrel, but others argue that underlying supply and demand fundamentals do not support such a spike and that a drop in prices is more likely.
What is clear is that oil has attracted cash from hedge funds and other momentum investors betting that the trend for higher prices still has a way to run. The dollar’s decline, which makes dollar-denominated oil futures a bargain to overseas investors, also has played a role in the recent flare-up.
Worldwide, economies are feeling the pinch of high oil prices, raising concerns that energy inflation could slow growth abroad.
But economists say global economies from Europe to China likely face no more risk of a recession due to high oil prices than does the United States.
Nevertheless, despite these adverse effects, increased energy efficiency, a progressive rather than shocking climb in oil prices and faster-paced income growth have made higher energy prices less harmful today than 30 years ago.
Oil’s rise is at least partially due to the dollar’s decline. A weak dollar increases the attractiveness of commodities, which are seen as retaining their underlying value relative to all currencies, and speculative interest in the energy market has surged in recent weeks.
Under such circumstances, the IMF maintains, Middle East policymakers need to “carefully calibrate” their spending on investment and social projects to the capacity of the economy to absorb such outlays.
The main challenge confronting oil exporters is to develop their non-oil sectors, an initiative that hinges on reforms to improve the business climate and make investment in non-oil sectors more attractive.
