Oil is on the boil

As the price of oil surges toward a symbolic milestone of $100 a barrel hitting $98.62, it is creating new winners and losers across the globe.

The record price has redrawn the economic and political map of the world, challenging old notions of power. Oil rich nations are enjoying historic gains and opportunities while major importers including China and India, home to a third of the world’s population confront rising economic and social costs.

In many poor nations with oil, the proceeds are being lost to corruption, depriving these countries of their best hope for development.

And oil is fuelling gargantuan investment funds run by foreign governments, which some in the West see as a new threat.

The basic Calculus of expensive oil still holds: exporters enjoy a windfall and importers bear a heavier burden. But some unexpected countries are reaping benefits, as well as costs, from higher prices.

Consider Germany: Although it imports virtually all its oil, it has prospered from extensive trade with a booming Russia and the Middle East. German exports to Russia grew 128% from 2001 to 2006; exports to the United States grew just 15%.

In Venezuela, President Hugo Chavez is pouring oil proceeds into a socialist revolution, creating free health care, free education and cheap food.

Concerns about corruption are very pronounced in Nigeria and Angola. Oil rich Angola is taking in two and a half times the cash it did three years ago. The IMF projects the economy will grow 24% this year, one of the world’s fastest rates. Yet analysts for the Catholic University of Angola’s research center say two in three Angolans live on $2 or less a day, the same ratio as in 2002, when the country’s decade long civil war ended.

China, a one time oil exporter that now must import half its oil to lubricate its booming economy, is facing politically troublesome shortages of fuel from Shenzhen to Beijing, as Chinese refining companies refuse to supply diesel at unprofitable state regulated prices. To head off a crisis, China raised retail prices for fuel nearly 10% very recently.

India is potentially even more vulnerable than China. Although it consumes a third as much oil as China, it imports 70% of its oil. It also has no strategic reserves and demand is growing faster than in any other economy except China’s. Like China, India subsidizes fuel, particularly the kerosene used by lower and middle class families for cooking, a policy that costs it some $12 billion a year. If oil reaches $100 a barrel and stays there, analysts say, India will be forced to roll back those subsidies.

In comparison the problems faced by other oil producers seem almost benign. For them, the most burning questions are what to do with all the money?

Norway, the world’s 10th largest oil producer has increased spending on kindergarten to $3.3 billion this year, from $2.75 billion, partly using money transferred from its $350 billion State Pension Fund. Most of the fund is earmarked to pay the future pensions of Norway’s 4.6 million people.

Perched on the Persian Gulf, Dubai has taken a similarly long view. Treating its oil reserves as temporary, it used the proceeds to expand pell-mell into tourism, trade, real estate and construction. But perhaps no country has reveled in its oil wealth like Russia. Russians have kept London’s high end real estate market buzzing.

There are a lot of Russian buyers around who are prepared to pay a vast amount of money. Back home, Russia’s oil wealth is trickling down. Russia is using it to finance priority national projects like improved health care and education, and access to affordable housing. Eight years ago, oil was trading at $16 a barrel.

The above is bound to happen cyclically if not continuously. It is prudent on the part of the nations which are growing faster than even developed nations say like India, China or that matter even U.S to increase their budgets in tapping non-conventional energy resources and quickly bringing them up to a commercially viable scale. At the outset India can think of wind power, solar energy, Solar energy retaining efficient batteries, bio-mass, tidal and other where the resources are available at least 300 days in a year and taper off dependence on oil. Then only the oil producing nations come to reasonable terms and stop enjoying at the cost of other non-oil or limited oil nations.