On Slippery Surface

While all the good news about the stockmarkets is spreading cheer among the population at large, something less benevolent may be creeping up on us: rising oil prices. Global crude prices have gone up to $80 a barrel, the highest level seen in 2009 so far. It is still about half of the $150 per barrel peak we saw in 2007.

Two factors seem to be driving this: first, expectations of demand have gone up as economic news across the globe is stabilising, and second, the weakness of the US dollar against other currencies. With prospects for dollar weakening further, investors are using crude oil as a hedge against inflation. (You can buy only so much gold.)

A report titled Heads in the Sand by Global Witness — an international non-profit organisation, which exposed the infamous ‘blood diamonds’ trade — says there will be a global supply crunch soon. Last year, the Paris-based International Energy Agency (IEA) said there could be a gap of 7 million barrels a day between supply and demand by 2015.

And alternatives to fossil fuels such as ethanol are encountering problems of their own. In Brazil, rising sugar prices have hiked the price of ethanol to above 70 per cent of that of petrol, which makes it uneconomical; so drivers in Sao Paulo and Rio are switching back to petrol.

By extension, that implies greater demand for oil, which doesn’t look very good for India, given our dependence on oil imports.

Another big hike in crude oil prices, and our recovery from the slowdown could go up in flames.