• PAGE ONE
• INDEX
• HOME

Crude relents

SINCE LATE NOVEMBER, there has been a distinct downward trend in the international price of crude, which cannot but augur well for, among other things, the Oil Pool Account (OPA) deficit for 2000-01. Tension in West Asia and a threat by Iraq to disrupt i ts oil sales had resulted in the Brent ruling at over $33 a barrel at the end of November.

However, by late last week, prices had dipped to such an extent that they were ruling at eight-week lows and by the middle of this week had dropped below $27 ``for the first time since July''. Since then there has been a slight upturn, but a sustained mo vement in this direction can perhaps be ruled out in view of the general agreement among oil experts and international agencies that, structurally, there is an over-supply of crude in the world market.

According to OPEC estimates, supply currently outstrips a demand level of 76 million barrels a day (mbd) by 1.4 million barrels. The International Energy Agency says that assuming OPEC output remains stable at October levels there would be a surplus of a bout a million mbd in the fourth quarter of the year and of 1.3 mbd in the first quarter of next year. In fact, the biggest test of this structural over-supply situation came when stoppage of Iraqi oil supplies (Baghdad exports 2.3 mbd under the UN-contr olled food-for-oil programme) to the international market during the first week of this month failed to have any sustained impact on prices.

Indeed, the OPEC president, the Venezuelan Oil Minister, Mr Ali Rodriguez, said that global stocks of crude and refined products have now touched 80 days worth of consumption, adding that when these stocks reach the 90-day level, prices would start to fa ll. It is against this background that the talk of OPEC reducing supplies in January is to be seen, the cartel's over-riding concern understandably being to prevent a fresh slide in crude prices (Brent futures were trading at $10 a barrel in December 199 8).

In view of the fact that even the World Bank -- in a report on the ``global economic prospects'' of developing countries in 2001 -- has said that crude prices are set to decline to $18-19 a barrel in a year or two, it is more than likely that relief on a ccount of crude prices is around the corner for countries like India. First, lower prices would automatically lead to a fall in the oil import bill, which is all set to double this year over 1999-2000 (during this April-July, for instance, oil and petrol eum product imports were worth $5.5 billion against $2.98 billion in the corresponding previous period).

As the Union Petroleum Minister, Mr Ram Naik, himself said, the rise in the import bill would have been even higher had it not been for the reduced demand for crude and product imports (for this financial year, the projected crude imports have been reduc ed from an earlier estimate of 84 million tonnes to 80.6 million tonnes while product purchases are slated to be lower than the earlier estimate of eight million tonnes).

Two other areas which will feel the impact of lower world crude prices are exploration activity and, of course, the OPA. One of the reasons for the poor foreign response vis-a-vis the first round of bidding under the New Exploration Licensing Policy (NEL P) was the prevailing unattractive world price of crude, which had the effect of raising the opportunity cost of investment in exploration.

The second round of bidding under the NELP is round the corner and the danger is that, if crude prices were to fall substantially, the same fate could await this exercise also though the Government has decided to offer, for the first time, deep-water gas and oil exploration slots to foreign companies on the high-potential west coast.

As for the OPA, the 2000-01 deficit is expected to touch Rs 12,000 crore even after taking into account the September price increase duty restructuring package and the subsequent rollback in the price of cooking gas and kerosene. While there is no doubt that a decline in crude prices will lead to a reduction in this deficit, it will probably be of little interest to the average citizen because it is unlikely to lead to a reduction in the price of products.

On the contrary, the real gainers will be the public sector oil companies, whose bills will be settled more expeditiously by the Oil Coordination Committee, not to speak of the relief provided to the Government in having a smaller residual deficit-gap to bridge with such instruments as oil bonds or short-term loans -- already a controversial issue.