The Hindu Business Line : High oil prices unlikely to drag down growth

As usual opinions differ on whether the rise is sustainable. Some weeks back, Goldman Sachs let a cat among the pigeons with its forecast of the price of oil hitting $100.

Within days, it crashed $10 to below $50. Just when relief (at least for consumers) seemed in sight, prices broke $50 again. There has been no looking back since. The last few days have seen an especially sharp move.

OPEC, the biggest beneficiary of the oil boom, actually does not want such high prices. Understandably. It will convert alternative fuels and new technologies, which are unviable, into profitable propositions. That will mean falling demand and prices for its most valuable (and only) resource and source of income and wealth in the long run.

The post-2000 picture is vastly different from the 1970s. Then, oil consumption was mostly confined to the affluent West. Wars and turmoil in West Asia resulted in supply disruptions.

OPEC had a virtual monopoly on production. A combination of pricing power and shortages tripled the price to over $30, which gradually fell back in the mid-eighties to $10 levels. The Kuwait war in the early '90s gave a boost to prices but they once again gave up all their gains.

However, the last couple of years have seen the market turn bullish as never before.

The proximate reason is not only demand growth in the West (the US' consumption of gasoline has only gone up despite the jump in prices) but also in the new growth centres of China and India which are seeing an explosion in their vehicle populations.

The other developing countries of the world cannot be far behind. Thus, despite the OPEC pumping at near full capacity, the demand-supply balance on an ongoing basis is precarious.

In this situation, the market has largely ignored the rising inventories of crude and products.

Clearly, as a necessity, the consumption and demand for oil and its derivatives are somewhat price inelastic. World over, the increasingly affluent middle class has no problem affording expensive gasoline.

Thus, it looks as though prices can go up quite a bit without affecting growth. (It is strange that our Government is dithering so much over passing on the price increase to consumers).

The bottom line: fears of a significant setback to the global economy on account of oil look overblown.

There is nothing to fear about high oil other than fear itself.

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