How Oil Prices Are Wrecking the Economy

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At the time of going to the press, oil prices are at $126 to a barrel, more than double the April 2007 price of $63 a barrel. The future doesn't look too bright with prophets of doom predicting still higher prices. In India, we are yet to feel the real impact of the flaring international oil prices even though over 70 per cent of the country's requirements are met through imported oil. The oil prices in India and many Asian countries are subsidized by government and controlled through price ceiling rules. High oil prices are here to stay in the long term and would require all of us to adapt our personal finances. But before we look at how to cope up, we need to know why the oil prices have risen so sharply and how this oil shock is different from the previous ones. Reasons of hike in Oil price

Speculative trading
Traders bet on future prices of oil through commodity exchanges. If there is a natural calamity, or if a country's president or the boss of a global oil company makes a statement which could be linked to oil, the traders at the exchanges bet on a higher price in the future. The record high price of nearly $140 per barrel is the July futures price of oil in the New York Mercantile Exchange. Geo-political tensions, leading to supply disruptions

Caused by war, terrorist attacks or military warfare in oil rich countries, which could affect oil supply. The US sanctions on Libya, Iran and the war in Iraq have all affected oil prices Blame it on fast developing countries

Shining India... and China and West Asia, where rising demand (at around 8 per cent from around 7 per cent a couple of years ago) is creating inequities between supply and demand Controlled production by OPEC

The cartel of the world's largest oil exporters called the Organisation of Petroleum Exporting Countries, accounts for two-thirds of the world's oil reserves but only 40 per cent of world production. OPEC does not want the market to be oversupplied as it would bring down prices. High prices suit the oil producing countries The dollar dunnit

That's right, as the dollar weakens and other currencies harden, crude oil prices, which are traded in dollar terms, move to compensate changes in dollar value. Ever Increasing Demands…
• China, India, Russia and West Asia oil demand: 20.67 million barrels per day • US oil demand: 20.38 million barrels per day
• China oil consumption: 7.89 million barrels per day
• 2.45 billion people in China and India used only half as much crude as 301 million people in the US • In India, energy use is less than 10 per cent of America's on a per-capita basis The International Energy Agency says.

• The world's energy needs would be well over 50 per cent higher in 2030 than today • China and India would together account for 45 per cent of the increase in global primary energy demand

In November, the International Energy Agency (IEA) is expected to revise its forecasts of future oil supply — based on research on 400 existing oil fields. Production growth in the new estimates will not be as high as the 116 million barrels a day — the IEA’s forecast in 2007 (the current level is at 87 million barrels a day) — but a much pessimistic number. The IEA forecast a gap of 12.5 million bbl a day: a demand for 37.5 bbl a day versus new capacity additions that would produce 25 million bbl. The Wall Street Journal suggests that the conclusions of the report could shake up the oil business. But will oil prices come down any time soon?

Russian company Gazprom, which supplies a quarter of Europe's natural gas, predicts oil prices, currently already very steep at $135 per barrel ($76 per barrel in 2006-07), will be $250 per barrel in 2009 •Goldman Sachs has projected that oil prices could rise to $200 per barrel by the end of 2009 •In fact, Morgan Stanley sees oil prices at $150 per barrel in the next three weeks •And closer home, the Oil and Natural Gas Corporation says three-digit oil prices are...
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