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The Administered Price Mechanism (APM) dismantling was expected to usher in an era of a brave new world of competitive prices, better margins and better returns. But as the Government keeps its hold on the sector, the fortunes of oil companies as well as the consumers take a hit.
News about oil embargoes sends shivers down the spines of people who are well versed with history of oil prices. The expected spurt in oil prices as Iraq announced a month long suspension of oil exports as a protest against Israel's invasion of Palestinian areas on West Bank, has made the economic forecasters grip their calculators in frenzy and work out the damage that more expensive oil might cause to a recovering economy.
On a daily basis some 16 million barrels of oil leave the Gulf through the Strait of Hormuz. That is enough to power every motor vehicle on the planet for 25 miles. The Gulf region aka Oil Producing and Exporting Countries (OPEC) accounts for 40 percent of global trade in oil. The more important statistics is that it makes for two-thirds of known deposits. Yet all those numbers come with caveats, which are surrounded by scary talks of unstable, spendthrift regimes and a lurking fundamentalist menace. Nevertheless, it is never wise to underestimate the bulwark of the oil empire. In the last 30 years, the oil prices have escalated sharply on five occasions: In 1973-74 after an Arab embargo; in 1979-80 after the Iranian revolution; in 1990 after Iraq's invasion of Kuwait; in 1999-2000 as the world economy boomed and the OPEC production quotas were cut and after the September 11, 2001 incident. On each occasion when the oil prices zoomed, the world economy went into a spin.
The ongoing conflict in the Middle East is intensifying and a global oil crisis is looming large on the horizon. With Iraq's announcement on April 8, 2002, of a temporary embargo on oil exports to the West, and threats from Iran and Libya to follow suit, the chances of sharply rising oil prices seem to be more. Colluding to increase the oil prices when the global economy is showing nascent signs of revival will not be an act that would be welcomed. However, in the light of recent events, OPEC's days of glory seem to be well over. For a while in the late 1990s, it appeared as if the oil cartel could regain its old power to keep up the price of oil according to their own will. The oil price has plunged after OPEC launched a price war to force Russia to join it in making substantial production cuts. Russia, which has now replaced Saudi Arabia as the largest oil-producing nation is not playing the ball, and the oil prices could go for a roller-coaster ride. Russian cost of oil exploration and refining is close to $10 per barrel and it can still make money with crude prices of $15 per barrel. But the same is not true with OPEC nations, which are inefficient producers, and want a range of $22-28 per barrel.
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