Adamant: Hardest metal
Saturday, March 29, 2003

Oil’s well?

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With the prospect of a big hike in its oil bill, India has a stake in OPEC acting responsibly

One way of tracking the coalition force’s progress in the current Gulf war is by observing the gyrations in crude oil prices. Within hours of US President George W. Bush’s 48-hour ultimatum to the Iraqi regime, the global oil market responded with a 10 per cent drop in the $35-plus per barrel price that had been ruling for months.

Of course, the oil sector strike in Venezuela and falling US inventories had also contributed towards a tighter market, but most of the price hike was due to the uncertainty of whether there would be a war or not.

Once the war began, crude prices plunged by almost 25 per cent on the belief that it would be swift and painless—for the Americans. But now that the Iraqi troops have proved to be more resilient than expected and the verdict is that the conflict will be more drawn out than hoped for at first, oil prices have begun nudging up once again to approach the $30 per barrel mark, aided and abetted to some extent by the upheaval in the Nigerian oil sector.

And if the war indeed goes beyond a month and the damage to the allied troops more extensive than anticipated, the pre-war concerns of prices hitting the upper forties or even fifties per barrel may yet be borne out.

With the news of Iraqi oil being set ablaze by their troops, the major oil importing countries, who had begun to breathe a little easier once prices began dipping, are back to calculating the impact of high oil import bills on their economies. Though the eventual outcome of the war is not in any doubt, the duration and intensity of the conflict will have a bearing on the market.

If Iraq’s oil sector, affected by a decade of sanctions, suffers further damage, it will take years of rebuilding, even on a war footing, before it can be brought back to its pre-1991 levels of production.

Despite reassurances of uninterrupted supplies by the Organisation of Petroleum Exporting Countries (OPEC) and its promise of making good any loss in Iraqi crude output, there are continued reservations about the cartel’s ability—and intention—to pump additional oil indefinitely to cool the market, given the cartel’s propensity to manipulate production to keep prices high.

Part of Washington’s interest in Iraqi oil is the wish to see OPEC’s wings clipped. With the prospect of a 20 per cent hike in its oil import bill from last fiscal’s Rs 67,000 crore, and every $1 per barrel adding a further Rs 3,000 crore, it would be in India’s interest if the cartel could be made to act more responsibly. One way of doing this is to ensure that a post-war Iraq is kept out of OPEC and its 112 billion barrels of reserves made available to usher in an era of cheap oil.

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