Crude Oil price burst
The world is finding itself on the edge over the inexplicable burst of crude prices. If you look into the global demand and supply position – which most often was the causative factor in the past – you find that this is not the case in the 2008 oil price burst. There are other factors: greed, insecurity and protective government policies that are pushing up the crude prices to never-before levels.
The crude oil prices are on fire – burning holes in our pockets and digging craters in the coffers of nations. From about $50 per barrel in January 2007, the crude oil price has skyrocketed to a record $142 per barrel on July 1, 2008, just $8 short of trebling in barely 18 months! Due to the relentless rise in oil prices, the Central government has been forced to raise the prices of petrol, diesel and LPG from June 4. So, you’ll have to shell out Rs 5 and Rs 3 more for every litre of petrol and diesel, respectively, and also Rs 50 more for the LPG cylinder. But you must consider yourself lucky because you’re still paying much lower than you would have otherwise, thanks to our government's largesse called subsidy. In fact, without subsidies, you would be paying about Rs 67 for a litre of petrol, Rs 63.38 for diesel, Rs 45.07 for kerosene and Rs 648 for an LPG cylinder! But the nation is not so lucky. India paid $67.988 billion for its import bill of 121.67 million tonnes of crude oil in 2007- 08, while it paid $48.389 billion for import of 111.502 million tonnes in 2006-07. If the prices had remained at the 2006-07 level, the nation would have paid $52.802 billion, which means India had to cough up over $15 billion more due to increase in prices in 2007-08.
Speculative Bubble!
If demand and supply situation is normal, then what is driving the oil prices? If some facts and figures are taken into account, rampant speculation in the futures market is behind the bubble in oil prices. There are 634 energy hedge funds today, as against just 180 in October 2004. Apart from hedge funds, large investment bankers such as Goldman Sachs, Morgan Stanley, Merrill Lynch, J P Morgan and Citigroup, have reportedly taken huge exposures in futures of oil and other commodities as a hedge against the falling value of the dollar. The rampant speculation in the futures market can be gauged from the fact that, as per an Economist report, investment in commodities index funds has grown from $14 billion in 2003 to $260 billion in 2008, a rise of almost 20 times! Out of this, almost half of the investments have gone into oil futures. That apart, the average daily dollar value of open interest in Brent and WTI crudes has galloped from a mere $22.6 billion in 2002 to $252.7 billion in 2008, an increase of more than 10 times!
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