Wednesday, May 21, 2008

Oil Shock

As per the ‘super spike’ price speculated by Goldman Sachs Oil Analyst Murti, we are only little past half the distance in terms of a barrel of crude oil costing $200. Today we are around $130, still $70 to go at which point the sticker shock at the pump will be around $6 per gallon.

Will that be a strong enough shock for Americans to start going away from their ‘oil addiction’ and SUVs? Well, Americans are gullible but not that fool. If any recent reports of auto sales and gasoline sales are to be believed, slowly ‘oil demand’ is morphing from an ‘inelastic demand’ to an ‘elastic demand’ – people are reducing their oil consumption.

Part of the vindication of Zakaria’s ‘post-American’ world is despite oil demand weakness in America, high global demand (read China and India) will not dampen the oil price that much. Meaning, during earlier Oil Shock, Americans went into the hole and the whole price edifice came down; there were no other prolific oil consumers than Americans then. Today it is different. This means reduction in American demand is unlikely to have immediate, meaningful drag on Oil price. Decreasing demand / consumption will not necessarily make life easy for Americans in short term.

Rest of the world will consume less oil eventually unless Chinese and India economies withstand the loss of American market due to weakening economy by increasing domestic demand. Despite assertions by Zakaria and other folks about the strength of emerging markets, it is not clear whether those economies will be fully decoupled from the American slow down.

Case in point is Dollar Rupee ratio. Indian Rupee is one of the few currencies which still do not appreciate against Dollar despite the beating Dollar has received against other currencies. Deprecating Dollar increases dollar denominated oil price and with the weak Rupee, Indians land up in importing solid ‘oil inflation’.

But then is slowing down of emerging markets the only solution to control Oil price? Why not, as the Goldman Sachs Analyst Murti hopes; we humans migrate to alternative energy sources? Of course, many economies are making that change (including American), but what is needed is the help from their respective governments. Alas, the idea for American Congress in addressing this ‘oil shock’ is to ‘sue OPEC’! As if that organization is subject to American laws and Americans are fool enough in not understanding the uselessness of such politically gimmickry.

Oil shock is one thing which is making people’s life measurable (and by the way most are not farmers to qualify for largesse of Agriculture Bill passed by the Congress). But inaction and lack of vision by Congress is exasperating this challenge. (President Bush – nah, he does not have anything to do with lives of Americans)

What Congress needs to do is ‘rein’ in the speculation, if any, in oil markets instead of drama of suing OPEC. It also needs to actively promote alternative energy sources. We are missing those actions and it is business as usual.

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