Implications of oil price rise

Reason for the oil price hikes
Energy on oil depends only for 10 per cent of the world's need. However, the oil price, at the time of writing, is over US$70.00 and many energy experts say that the price is likely to rise to US$100.00 ( although Steve Forbes, the chief executive of Forbes Magazine, thinks that in 2006 the price will drastically fall down because continuing high price is unsustainable ).

The continuing surge in oil price is taking us into unfamiliar territory. It is not that we have not experienced soaring oil price before, however, this time, the reason for the price hikes is so different.

Tap here to add The Daily Star as a trusted source

When we experienced oil price "crises" in 1980 or 1974, the explanation was straightforward, as were the effects. They were due to supply shortfalls causing prices to soar for relatively brief periods, feeding into inflation and interest rates and tipping western strong economies into recession.

This time, according to energy experts, the problem is not much one of supply but of demand. The high demands of oil-hungry China and India are ascribed to the rise, coupled with the political instability of the Middle East region. Furthermore the dismantling of eight refineries at the US coastal belt due to the Katrina hurricane has in some places in the US increased led to an all time high price of gasoline (reportedly from US$3.90 to 8.00 per gallon).

China's energy consumption has rocketed to support the growth in its share of the global economy, which has nearly doubled in the past decade. Its appetite for oil has roughly trebled in that period and it has, in recent years, reportedly accounted for close to 40 per cent of the growth in world demand for oil. India is also following China for its demand for oil. The source for oil in Iran and in Myanmar for India is an instance in point.

Why has it not affected adversely global economy as yet?
The old rule of thumb was that a US$10- a barrel increase in oil prices saved 0.6 percentage points off global GDP (Gross Domestic Product) and 0.8 off US GDP. On that basis, the present hike would have wiped about 3 per cent off global growth in the past four years and 4 per cent off US GDP.

Yet, until very recently, the US and global economies have been growing quite strongly, and the US emerged from recession. Inflation and interest rates have been at historically low levels in western economies, despite the increases.

Some economists argue that the fact the price started rising when the US was in its post 9/11 recession and that the rise has been steady, rather than instant, explains why the impact on economies has been muted.

Another possible strand of the explanation is that Western consumers have exploited a housing boom to finance massive levels of consumption, and may have felt wealthy enough to be reasonably unconcerned. Another fact is that the energy intensity of most products is lower today than it was in previous oil shocks.

The more interesting is the relationship between the energy China is consuming and the impact of its production on both commodity and manufactured goods.

It imports commodities in vast quantities, pushing up the prices of oil, coal, copper, nickel, and just any mineral resource commodity, while exporting cheap textiles, whitegoods, car parts, computer parts, and other manufactured goods. The result is that it has inflationary impact on mineral commodities but a deflationary impact on consumer products.

It has started to bite
Economists argue that the US$20 to US$30 a week extra that the households were spending on petrol they were not spending on buying consumer goods. They say that oil price has become a danger to national economy.

While some parts of the globe have lived more comfortably with high oil prices than others, Europe and parts of Asia are quite vulnerable to sustained higher oil prices. In the US, economic growth has started slowing, perhaps because of high fuel costs have been accompanied by rising interest rates. Consumer confidence and retail sales have shown downturn trend. The effects of Katrina hurricane is likely to affect negatively US economy that in turn will have an adverse impact on global economy.

Airline industry as a whole is in trouble. Many airlines have warned of a profit fall up to 40 per cent in 2005-06.

Alternative sources of energy
Nuclear energy is considered the most environment friendly because it does not produce greenhouse gas emissions or air pollutants, with low fuel costs and large fuel reserves. The disadvantages, however, are that it produces dangerous waste and its high capital costs. The Vienna-based UN agency, IAEA (International Atomic Energy Agency) supports generation of nuclear energy.

Other sources of energy, such as, wind-power, biogas, exploitation of tidal or sea waves, solar heat, geo-thermal and crop wastes are to be viewed as substitute for oil. Ambitious renewable energy targets and clever research and development strategies can help encourage the swift development and widespread deployment of renewable energy and energy-efficient technologies.

In Germany, wind-power beams have become a common sign (some say ugly sign) in many parts of the country, France gets its 78 per cent energy from nuclear plants, Belgium 57 per cent, India 17 per cent, South Korea 40 per cent, US 20 per cent, and Japan 25 per cent of their overall production from nuclear source.

Conclusion
The higher prices are starting to show up, in a damaging and visible way, in core parts of the economy of many countries. The most vulnerable are the oil importing Asian countries including Bangladesh. Economy of these countries is going through a critical phase and the macroeconomic stability is suddenly faced with serious challenges. Their economies would grow much slower than predicted earlier in the budget. Furthermore petrol price rise leaves consumers extremely worried.

It is time that alternative source of energy must be found. There is however no alternative energy that is cheap. They will cost more in dollars per unit than present day energy-supply technologies.

Recognising that new energy-supply will be costlier in the beginning than the prevailing one is the first step on the road towards building a sustainable and environmentally friendly energy in future. The industrialised countries have not spent money on alternative sources of energy anywhere near the funds which go to the space exploration, according to Canadian environmentalist David Suzuki.

Barrister Harun ur Rashid is a former Bangladesh Ambassador to the UN, Geneva.