The dilemmas of the oil economy

Oil will remain a crucial factor in the global economy for a long time to come. While supplies of oil is crucial as can be seen from the economic sanctions against Russia in the wake of the Russian invasion of Ukraine, pushing up oil prices and with rising inflation in many economies consequently, there is also the other aspect of the demand for oil. If the global economy is subdued for various reasons because of the partial slowdown in China and impact on growth because of inflation, two of the big economies in the world, the demand for the oil would be less than expected. In a way, consumption of oil is a barometer of growth in the economy.

That is why, oil experts, apart from the Organisation of the Petroleum Exporting Countries (OPEC) and the International Energy Association (IEA), are making their estimates of the demand for oil.

There was cheer when consumption of oil which went down in 2020 because of the global disruption caused by Covid-19 pandemic rebounded in 2021. It is indeed the case that inflation is caused by rise in fuel prices, and it is feared that high oil prices will mean lowered demand in 2023 compared to 2022. OPEC had estimated that demand for oil would touch 3.28 million barrels per day in 2022, and it was revised upward that it would touch four million barrels per day before finally settling down at 3.36 million barrels per day.

With the per barrel price hovering at $120, there is not much hope that the demand for oil would remain at a high level. It is generally the case when there is adequate supply and sufficient consumption, then the prices usually level off. But the disruption in Russian supplies has created a disruption pushing up the prices.

The United States wants the OPEC to increase oil production, but many of the OPEC members are not willing to do so because that would not make business sense for the oil producers. It is generally expected that among other things, American President Joe Biden who will be visiting Saudi Arabia next month would be persuading Riyadh on the issue of stepping up oil production. It is not however clear that he will succeed. America has also been asking the European countries to buy gas from the Gulf Arab countries to make up for the disruption in gas supplies from Russia.

The politics and economics of oil are not just interesting but of great importance in keeping the world economy on an even keel. Then there is the issue of climate change. Many of the climate change advocacy groups want Europe and other countries to use the disruption in Russian supplies of gas and oil to lessen their dependence on these carbon-emitting sources. It is indeed a drastic demand. The prescription is: consume less, travel less and fly less. This goes against the foundation principle of modern economy where growth is necessary to improve the lives of people.

Though much emphasis is being laid on renewable sources of energy, it is understood that oil cannot be eliminated from the energy basket. It is not even clear that the proportion of oil consumption can be pushed down for a long time to come. The 2030, 2040, 2050 deadlines to reduce dependence on fossil fuels look quite unrealistic from the 2022 perspective.

Governments and the people have to make a concerted effort to evolve realistic global economic agenda, where the present momentum of growth, despite its erratic nature is kept up. There are hundreds of millions of people, especially in Africa, who live without electricity. A significant part of the production of electricity is from gas-fired plants. There are no easy choices and no easy solutions.