Wednesday, June 17, 2009

Get used to oil price in three digits

The price of crude oil has climbed steadily to $70 a barrel. Its of course, way off, from the peak of $147 it touched in July ’08. But its been climbing steadily over the last couple of months. Two major events await us in the near future.

The first is inflation. Its already a big risk because of the massive amounts of money governments, the world over, have been pumping in to ward off the recession. When oil prices shoot again, everything is going to be affected. Inflation will hit the poor most – the price of food will rise. Many governments will be tempted to subsidise the price of oil and public finances will become a further mess than they are, in most countries. Inflation is going to be a killer ; unfortunately there’s not much that we can do.

Governments should have been acting through last year. When the price of crude oil fell to just above $30, they should have been creating a fund to cushion the inevitable rise that was to come. Nobody did this. Governments who control the price of oil in their countries should have been steadily increasing consumer prices in small doses. But that’s not a politically convenient thing to do; so nothing was done. “Cheap Oil” is an oxymoron. We’re in for a killer increase.

The second major event is the greatest transfer of wealth in human history. All of us, the world over, will transfer a huge portion of our income to fatten a small population in the Middle East & Russia. Sure, this is a free trade and not coercion; the price is after all determined in a free market. But oil is not just any other product, Like it or not, in the way we live, oil has become a necessity, like water and air. When the price of something as basic as that shoots up, it has a major impact on the world. In the long run we can adjust, but in the short run the pain will be high. This has profound social and geopolitical consequences. All of us will lose and a small percentage of the world’s population will gain immensely. History has shown us that when a few enjoy at the expense of many, a revolution starts.

This sounds like a doom and gloom post. Unfortunately, that’s how I see the near term future. We better get used to oil price in three digits. Oil, I’m afraid, is going to become a four letter word.