Friday, October 23, 2009

Obil Boil

Oil on the boil again, screams the headlines in India’s Economic Times. Or as our wonderful little friend Chotu might say, Obil Boil. I am certain that his words were prescient and not just a child’s lisp of mama’s olive oil.

Crude oil prices have touched $80 a barrel. The US dollar has continued to weaken and since oil prices are globally stated in US dollars, they are bound to rise further. I argued that the world must get ready for expensive energy for the foreseeable future here, but governments have lost a golden opportunity, when oil prices were low consequent to the recession, to prepare their citizens for the coming times when oil prices will be in 3 digits.

This has profound implications for the whole world. Firstly inflation will inexorably rise. The risk of inflation in the near term is the highest, with two huge factors contributing to it – the price of oil and the stimulus money that governments have spent. When oil prices rose last time to the peak of $147 , we had riots as it has a direct impact on the cost of food. The impact on poorer countries was disproportionate. Secondly the world will see a massive transfer of wealth from everywhere to OPEC – primarily the Middle East. Such a transfer of wealth is without parallel in history, with profound geopolitical fallouts.Churchill’s famous words may have to be rephrased to “never in the field of human history have so many paid so much to so few”.

Even now, it isn’t too late for governments to act. They must slowly abolish all subsidies on petroleum and then keep increasing the price of petroleum products in small doses so that people are slowly taken to the high oil price world, instead of a cataclysmic jump. They must not reduce prices when crude oil weakens occasionally – instead they should build up a fund to cushion against periods of extreme rise.

One of the possible fallouts of a sustained high oil price world might be that the world will start to go more local than go more global. Products may start to be produced nearer where they are consumed. Jetsetting around the world may start to become rarer. Brits having strawberries in December may become a thing of the past. Perhaps in the world of the future, a Chotu saying Obil Boil, may become common place and not raise an aaawww anymore. Now, that is not a nice thought.