The Global Inflation Wave and OPEC's Role
Walid Khadduri Al-Hayat - 20/04/08//
A few points need to be pointed out before discussing the issue at hand. First, the global wave of inflation affecting commodities and the current global economic crisis have nothing to do with oil prices. The fact is that the causes behind the rising prices of foods include result from many factors; the rising standard of living standards in major Asian countries such as China; the commercial production of bio-fuel in the United States which has diminished the area of agricultural plots dedicated for growing wheat and barley, and hence the shortage in the supplies of wheat available for bread and pastas; the rise in international prices despite the expansion of areas dedicated for the growth of corn since huge amounts of the produce have been allocated for the production of bio-fuel rather than as animal feed, and this in turn has led to a decline in the volume of meat supplies in the market and to price increases.
The international economic crisis, on the other hand, is attributed to the sub-prime mortgage crisis in the US as it is well-known, to the lack of transparency surrounding these mortgages. The seriousness of this crisis that has according to preliminary estimates cost up to one trillion dollars is that its actual extent remains unknown and that it is expected to expand in the future to include credit card debts.
Despite the absence of a role for oil in either crisis, it is evident that the international public opinion is linking the global inflation wave and the irrational increase in crude oil prices. It suffices to point out that oil prices have been rising on a daily basis, even on hourly basis, and without evident causes while the price of crude oil hovers around $115. All it takes is one media report that points at the impact of high oil prices on the transportation cost of food products to link the rising prices of food products to oil in the public mind despite the huge gap between the two events.
The fact is that the increase in food prices was accompanied by basic and significant changes in the production and ways of consumption of agricultural crops, not to mention the actual shortage in the supplies of a number of important crops. At the same time, sufficient oil supplies are reaching the market, not only to meet the demand of consumers, but also for reserves. The persistent stability of market supplies attributed to the flexibility of OPEC states has created a state of separation between the oil market (demand and supply) and its prices. This is caused by the depreciating dollar and speculations as investors resort to oil and commodity markets to secure high and quick profits away from the fluctuation of currencies and stock prices, yet in doing so, they contribute to the continuous increase in oil prices.
At this point, it is worth mentioning an important prediction issued by OPEC and the International Energy Agency in the past few days over the possible decline in oil demand in the coming few months as a result of the slowing global economic growth.
What implications do these have developments for OPEC?
First, these developments and predictions confirm the correctness and credibility of the statements made by OPEC ministers about the sufficient oil supplies in the market and the warning that any significant increase in supplies can depress prices, especially with the expected decline in demand in 2008.
Secondly, this confirms the second claim made by OPEC ministers that current prices do not reflect market fundamentals, but are rather the result of speculations and the depreciation of the dollar.
Thirdly, despite the importance and correctness of the two abovementioned claims, there remains another inevitable fact that oil producing countries. By virtue of its role as a major and successful international economic institution and the fact that it deals with a strategic commodity such as oil, OPEC has to take effective actions rather than adopt a passive policy toward developments in oil prices, especially as these developments have taken the initiative from OPEC. Such a policy is needed even as the huge and evident benefits resulting from rising oil prices have surpassed all expectations.
After all, OPEC nations are third world nations, and the growing feeling of poverty and the inflation getting out of control will lead to political and social complications. The recent incidents in Egypt over the bread crisis represent only one example of these complications. There are also indicators that this phenomenon will extend to other Arab countries. Evidently, no additional crises and problems are needed, especially in Arab countries.
Fourthly, it is certain that oil prices sustained at these high levels will lead to accelerating the development and using alternative energies. It is not surprising today to see hybrid cars on the roads of western industrial countries and Japan running at 80 km per gallon. Ultimately, these alternatives do not constitute a threat to the oil market in the foreseeable future, especially with respect to the transportation sector. Yet, the persistence of international economic crises over long periods of time and the potential of their escalation along with the daily and irrational rise in oil prices may lead to unanticipated surprises, let alone the general feeling among the public that oil plays a role in these developments.
*Energy Expert
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