The Hindu Business Line : `Oil prices set for correction'

Speaking to Business Line, Mr William C. Ramsay, Deputy Executive Director, said: "These prices are clearly not sustainable and a correction can be expected." International prices topped $54 a barrel on Tuesday.

The IEA is an intra-governmental organisation within the Organisation for Economic Co-operation and Development.

Mr Ramsay was in Bangalore, to attend a workshop on Energy Efficiency Standards and Labelling by the Government of India. Asked for a timeframe for the price correction Mr Ramsay said, "It is difficult to predict but it could happen over the course of the next few months. However, he qualified it by saying that the retreat in prices would not return to the pre-1998 prices, when it dropped to as low as $15 a barrel.

He said that the current oil market fundamentals were supportive of the high prices. " It is not a supply side problem," he said. Currently, the demand worldwide is estimated at 82 million barrels a day whereas the production is about 84 million barrels a day. He said the problem was worries about future supplies on account of the deteriorating political situation in West Asia and anxiety over the stability of Saudi Arabia. Besides, he said, the strikes in Norway and Nigeria fuelled the worries. Also, there were technical problems, especially shortage of tankers for transportation.

Oil futures were being rolled over and prices were therefore being driven up. "Oil is now the market where people think they can make money. Many will burn their fingers when the correction starts," he warned.

India currently imports anywhere between 1.7 and 2 million barrels per day and is faced with rising merchandise trade deficit on account of the current high prices. Besides, high prices for imports have also driven up inflation. The IEA's forecast could provide some comfort for the oil industry. Almost all the oil companies have been demanding a hike in prices of products or alternatively, bring down the duties on crude since refinery margins have come under tremendous pressure.

The Government has balked at hiking oil prices and has instead chosen to tinker with the excise and customs duties. Customs and excise duties on petroleum products of mass consumption were dropped in August. Customs duty on diesel, which has the highest inflationary impact, was dropped from 20 to 15 per cent and excise from 11 to 8 per cent.

Duties on mass consumption items, liquefied petroleum gas were halved.