1972, when the first major oil crisis erupted with the Arab and
middle-eastern oil producers putting an embargo on crude oil sales,
it wreaked havoc on oil prices, which almost overnight increased
four-fold-from $3 to $12 (Rs 144 to Rs 576) a barrel-leading to
a major recession in 1973-74. Years later in 1991, when Iraq overran
Kuwait and the US stepped in, it resulted in the second oil crisis,
when oil prices again shot up. Cut to 2003. The US is on the verge
of waging a war against Iraq and the mood in the Middle East is
nervous. Should we then be apprehensive about oil prices and what
their movement may mean for the global economy?
Probably not. True, the Gulf still accounts
for around 40 per cent of the world's output of crude oil and there
are fears that a war, coming at a time when the Venezuelan national
oil company, PDVSA, is grappling with a major strike, may force
oil prices to touch $40 (Rs 1,920) a barrel or more (up from the
current level of around $38.
Yet, no one seems to be losing sleep over it.
Why? Because oil as a political weapon has lost its menacing edge.
Unlike in the earlier years, in the event of a war, it is only Iraq,
which produces merely 2 per cent of the global demand, and not the
other member countries of the Organisation of Petroleum Exporting
Countries (OPEC) that may put an embargo on oil sales. Their economies
are too dependent on oil sales to push them into such a decision.
In fact, countries like Saudi Arabia have already publicly announced
that they will make up for any shortfall, arising from an embargo.
Fears about another oil crisis would have escalated had some other
oil producers in the region joined Iraq's cause, as they did in
1991. After all, the region produces as much as 25 million barrels
(of the world's consumption of 78 million barrels) a day. But with
none of these countries inclined to rally behind Iraq, the clout
of the oil producers is a benign rather than a threatening one.
Another reason why world markets have discounted
the effect of a war with Iraq on oil prices is because the dependence
on oil as a driver of global economic growth is far less today than
it was in the 1970s because the developed world depends more on
the services sector to spur growth rather than on the manufacturing
sector. Also, the past crises have made most countries wiser: they
maintain strategic oil reserves that they can draw from in case
There is a third reason for the absence of
panic. Even if war was to spread from Iraq to other countries in
the region, today, unlike in the 1970s, there are other oil producers
to fall back upon. Russia, for instance, already produces more than
7.6 million barrels of crude oil a day and hopes to increase that
steadily to 8.2 million by end-2003. And even though crude output
from the North Sea is declining, it is still quite substantial enough
to meet immediate needs. Plus, there are other oil producing nations
from other regions making their contributions-Canada, China and
Mexico, to name some.
Even for economies that are largely dependent
on oil imports like India, there are spot markets where they can
buy crude off the shelf. Malaysia is one such market. No wonder
then that India's petroleum minister Ram Naik last fortnight allayed
fears of an impending oil crisis in the event of an US attack on
Iraq. Not only can India draw on its strategic petroleum stocks
(equivalent to two months' consumption) but it has also made contingent
arrangements to buy oil from countries that are not in the war zone.
But price, not availability, may be what matters
for developing countries like India, which imports 74 per cent of
its oil requirements. Last year, the bill for India's oil imports
was $12.7 billion (Rs 61,000 crore). And a $1 (Rs 48) increase in
oil price can raise India's oil bill by $1.7 million (or Rs 8.16
crore) a day. Yet there is some salvation in the fact that India's
foreign exchange reserves are bulging at $75 billion (Rs 360,000
crore), a potential buffer against sharp increases in oil prices.