The New Nation - Internet Edition

THE price hike of fuel oil in international markets continues unabated creating deep worries worldwide. Only days ago, the price was some $132 a barrel and it was expected to rise no further. Rather, in the wake of the meeting recently between major oil producing and consuming countries, hopes were created that instead of rising further oil prices could start falling whatever the margin of such decline in prices. This hope was boosted by the declaration by Saudi Arabia that they would increase production. A similar announcement was also made by UAE, another major oil producer. But it did not work.

Thus, this untamed hike in price of oil is like a puzzle. According to economic rules, price of a commodity rises in the face of its scarcity or when demand for it outstrips supply by a big margin. Emerging economic giants such as India and China are, no doubt, demanding more oil. But their demands have not risen unusually all on a sudden. There are reasons to think that current supplies are roughly matching demand and so price should be maintained at an equilibrium level. Why this is not happening needs to be traced to other factors.

It appears that the main factor is the uneasiness caused by the news that Israel and the US are about to attack Iran. If this attack is really carried out and Iran blocks the Straight of Hormuz in retaliation, then supplies of oil to West Europe, USA, China and Japan could be severely disrupted. Thus, speculators are thought to be bidding up prices in anticipation of such a supply shock. A major disruption of oil supply from the main producing region would certainly serve a blow to the global economy from which none would escape unscathed.