‘Volatile Oil Prices a Big Worry’

http://www.arabnews.com/?page=6§ion=0&article=86700&d=17&m=9&y=2006&pix=business.jpg&category=Business

Tang Li, Arab News

SINGAPORE, 17 September 2006 — Indian Finance Minister Palaniappan Chidambaram called on the International Monetary Fund (IMF) to play a more proactive role in regards to the oil market.

Chidambaram, who is leading the Indian delegation (comprising of Bangladesh, Bhutan, India and Sri Lanka) to the IMF’s Monetary and Financial Committee, was addressing the committee on the global economy.

In his statement to the committee, Chidambaram noted that while the global economic climate was healthy, the global economy faced risk from inflationary pressures, high and volatile oil prices and global trade imbalances. He noted that oil prices were a major concern, especially for developing nations.

Chidambaram told the committee that while rising oil prices had initially pushed up headline inflation, spare capacity and an increase in productivity and stronger corporate balance sheets had helped the global economy sustain inflationary pressures. Major central banks, he said, had been promoted to raise interest rates to keep inflationary pressures in check.

However, Chidambaram questioned how long raising interest rates would be effective in slowing down economic growth and inflation if high oil prices remained high. He noted that, “Higher interest rates in advanced economies had implications for financial markets,” but for emerging markets, they could, “Exacerbate vulnerabilities.”

Chidambaram told the committee that the failure of high oil prices to stimulate higher investment to augment oil supplies reflected rigidities in the oil market and he noted that, “It is difficult to fully explain the sustained high oil prices purely as a result of supply-demand balance,” and he noted that, “We think there is a strong element of speculation and profit taking in the market.”

Chidamaram talked about the importance of oil to the global economy and said that there was; “A need for policy intervention, both at national and international levels, to improve the market microstructure and incentives investment in oil production.” India’s economy has seen India’s appetite for oil grow by leaps and bounds in the past few years. According to the latest data on the first quarter for the fiscal year 2006-2007, India’s oil imports for the month of June 2006 were valued at $4.82 billion, up 55.59 percent from the same period one year ago.

The economy’s need for energy has made India sensitive to the fluctuations in the oil market. According to Alexander’s Gas & Oil Connections in 2004 when oil was trading at $45 a barrel, the Indian government had to cut taxes on gasoline, kerosene and cooking oil to ease pressures on the economy and the population.

India imports three quarters of her oil needs and her oil bill accounts for a third of the total value of all imports. According to Alexander’s Gas &Oil Connections mentioned in 2004 that J.P. Morgan Stanley warned that a five-dollar increase could shave growth by a quarter of a percent.

Given India’s vulnerability to the price fluctuations in the oil market, India, like China has been on the lookout for oil supplies and this has helped to shape its international relations. This has been particularly true of its relationship with Saudi Arabia.

Harsh V. Plant, a lecturer at the defense studies department at Kings College London noted that the Kingdom and India had, “Significant interest beyond oil.” However, India’s growing economy and appetite for oil means that, “Energy is now the driving force in Saudi-Indian relations.” The Kingdome is a chief supplier of oil and India is currently the fourth largest recipient of Saudi oil after China, the US and Japan.

Saudi-Indian relations have been on an upswing in January 2006 when Custodian of the Two Holy Mosques King Abdullah became the first Saudi king to visit India since 1955. During his visit to India, King Abdullah emphasized Saudi Arabia’s commitment to provide uninterrupted supplies to friendly countries like India regardless of global price trends.