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Energy - Is it just a price spike?

Aug 17, 2000

Energy markets are once again in turmoil. Crude oil prices surged earlier in the week to touch a ten-year high. The price of crude rose by more than 5% to breach the $ 32 per barrel level.The high crude prices will increase energy costs across the globe. Energy is an integral part of industrial activity and higher prices can threaten cost-push inflation. Worldwide interest rates are already on the rise and added inflationary pressure may result in a further hike in the cost of money. Such a scenario is an ominous sign for future real investment activity and economic growth.

The rising crude oil prices are the result of several factors. Although, Saudi Arabia repeatedly stated its intention of unilaterally increasing crude output such an increase has not materialized. Further, with an Organisation for Petroleum Exporting Countries (OPEC) summit scheduled for the end of September, it is unlikely that Saudi will make any move that will jeopardize its relationship with the cartel.

The President of Venezuela, Hugo Chavez, an influential member of the cartel has said that the current crude prices are within acceptable limits. Energy markets reacted adversely to this statement as it indicates that there will be no immediate increase in crude output.

Finally, the fear of a more than expected drop in petroleum stocks in the largest petroleum consuming market (USA) sent prices soaring last Tuesday. As we enter into the winter months the demand for oil will further pick up and put added upward pressure on prices.

The rising crude prices, besides being detrimental to world economic growth, has put added pressure on the Indian economy. India's oil import bill is slated to double this year to Rs 805 bn as we import 80% of our crude requirements. This will further widen our current account deficit. Is it then any surprise that the rupee weakening?

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