IN economics, the historical causes of a sharp and sudden rise of commodity prices have long been linked to the supply/demand formula, natural disasters, wars and geopolitics in the oil-producing countries. The sharp increase in energy prices, however, does not seem to lend itself to such cause and effect diagnosis. In broader terms, it is a combination of many factors, some of them we can hint at, some we cannot. Western politicians, alongside their top economic advisors, are clinging to the idea that a shortage of oil supply in the market is a fundamental factor that drives prices to record highs. In a meeting of the G8 finance and treasury ministers, Henry Paulson, the US treasury secretary, told reporters that the problem “stems primarily from tight supplies,” warning G8 ministers against adopting short-term solutions to that problem. Likewise, the British Chancellor, Allistair Darling, has tacitly agreed with his American counterpart's interpretation, urging oil-producing countries to increase production so as to meet the increasing demand in the global market. However, other politicians do not share the same view. The Italian minister of finance, fir instance, has dismissed these interpretations, putting the whole blame on what he calls” numerous speculations” that shape the oil contracts of the future. For some strange reasons, analysts in the oil market strongly believe that increasing production is going to bring prices down. Many countries, seemingly affected by the recent soaring prices, are pressing hard on OPEC members to increase production. Although the current levels of oil prices have brought revenues to OPEC countries, the far-reaching consequences of increasing oil production would be devastating on the acutely economies of these countries. However, one may ask: what are the other causes of the recent hike in oil prices rather than the supply and demand saga? Other fundamental factors are rarely mentioned by Western politicians and Wall Street forecasters. After the US-led invasion of the oil-rich Iraq, there has been a wide speculation that oil price rise would be halted. Iraq, a founding member of the Organization of Petroleum Exporting Countries, is in a deep and intriguing political and security crisis. Despite Iraq's huge oil reserves, the country's ability to increase production is largely crippled by the ongoing violence and political instability. It will take time, no one knows how long, for Iraq to return to play a key role in the oil market and, therefore, to influence the prices again. Since oil is traded in dollars, the price of oil is largely influenced, negatively, by the sinking value of the US dollar. The US dollar is losing its value to other currencies such as the Euro and the Pound Sterling. OPEC's decision to trade oil in another currency may not be of a great use to curb the increase of oil prices. Besides the declining value of the dollar, turbulences in the oil-producing regions have led to a great deal of uncertainty in the oil prices. In the Middle East, the world's largest oil-producing region, Israel's confrontation with Hezbollah in the summer of 2006, alongside political turmoil in Sudan, Somalia and the confrontation with Iran over its controversial nuke program, all have a direct effect on the soaring prices of oil. Such problems, if remained unresolved, would continue to push prices even higher than their current levels. For many analysts, it is part of a world phenomenon. Prices of food and commodities have risen sharply across the entire world. This is partially attributed to the phenomenal growth of Indian and Chinese economies. The emergence of India and China as key economic players has increased the demand for oil worldwide. According to numerous reports, China imports half of its oil from abroad. In the last year alone, Chinese consumption of oil increased by 15 percent and is expected to increase further this year by nine percent. India, another economic tiger, has increasingly grown thirsty for oil. Likewise, it imports 1.4 million barrels per day at present time, which is expected to rise to five million barrels per day by the year 2025. India has the world's most energy demanding economy because it depends heavily on foreign energy supplies. Unlike China, India does not have huge investments in oil production and, because of that, is feared that its economic growth may adversely be affected by any dramatic change in the future levels of oil prices. In the end, consumers, particularly in the developed world, should make a thorough and logical review of energy-related decisions. In their approach to energy problems, politicians of the developed world have regularly blamed oil-producing countries in any oil crisis. They have long been threatening these countries that a post-oil era is imminent, thanks partially to environment-friendly alternatives such as the well-celebrated biofuel. These threats, alongside oil taxation policies would not solve the problem but would further deepen it. – The writer can be contacted at [email protected] __
