Economy Watch Spiralling oil prices and Indian energy security

On April 25, 2008, there was news on CNBC.com that the crude oil price went past the 119 USD/barrel after a US army ship fired warning shots at two Iranian boats. World has seen the price rise of crude oil to more than double from 50 USD per barrel in 2005 to almost 118 USD per barrel now. Why the oil price is rallying at such a steeper curve? What is leading this phenomenon? What could be its implications on the world in general and Indian economy in particular?

Today'sworld is increasingly tending to be major consumer of energy. Use of some forms of energy such as electricity or petroleum products like gasoline or diesel, is taken for granted in our everyday life. Today, we cannot think of a day without having to use some forms of energy.

Primary sources of energy are many. Coal, crude oil and natural gas that we get from oil and gas wells around the world, are exhaustible forms of energy. World today depends on these sources, most notably on the oil and gas sources.

There are other sources such as hydropower, wind, tidal power and solar power. They are renewable sources of energy or non-conventional forms. As can be seen in the pie chart below, the usage of renewable sources are still in very small percentage of use, as their potential has not been fully developed primarily due to high cost of production.

Rise in price of oil
Price of oil, like any other commodity, is governed by the demand and production capability. Since it is a naturally available source, both its price and production are also subjected to geo-political events. A major oil producing nation, Iraq, is in turmoil now. Another major oil exporter, Nigeria, too has been facing problems from local militant groups, who are abducting the oil workers and targeting the oil installations for attacks. These problems have affected world'soil production profile and hence have contributed to crude oil price rise.

The demand for oil in the world has gone up considerably in the last few years, as the average consumption of oil has increased in the developing nations like China and India.

Crude oil demand in millions of barrels/day