The Indian Economy Blog

August 23, 2005

Energy security

Filed under: Business,Energy — kaushik @ 7:49 pm

I have a slightly different take from Blue Sky’s on the subject of overpaying for oil companies.

While I don’t know whether we are anywhere near peak oil (we seem to start fretting over this whenever oil prices reach stratospheric levels) , I believe that over the next several years oil prices will continue on an upward spike ( In last sunday’s NYT magazine Peter Maas had a good in-depth story on oil) and Indian oil consumption would continue to go up. A premimum of 21% on current market price may not be too high a price to pay under such circumstances. What may be a bigger deal is the political uncertainty in Kazakhstan. But then show me a third world country with large oil reserves that has political stability! From a geopolitical risk perspective – I am not sure that we can buy our way to energy security (our oily overtures to Iran run the same risk). But it is certainly worth trying.

Wall Street Journal had a front page story on this subject this morning (‘Persuit of Oil Firm stokes Rivalry of Asian Giants’):

While the US remains the world’s biggest consumer of oil by far, China and India are quickly emerging as the great markets of the future as their consumers trade in their bicycles and scooters for passenger cars. Faced with stagnant production at home, India now imports 70% of its crude oil.

India has pushed for collaboration between Indian and Chinese national oil companies on selected bids. But one senior official at an Indian oil compan said he didnt think it would lead to many joint bids anytime soon. “Both countries want all the equity oil and gas which is available,” he said. “We can’t suddenly become great griends.”

…Although India’s ONGC is starting with lucrative contracts, officials there and at other Indian Oil companies complaint that they are at a disadvantage next to Chinese companies, which they say have access to cheaper loans through the Chinese state and are better able to stomach the exorbitant cost of buying oil assets at a time of high oil costs.”

Neither are we the only people agonizing about oil. – check out Fareed Zakaria in today’s Washington Post.


  1. American Inability to solve Oil Problem

    Comment by Umesh Patil — August 24, 2005 @ 2:14 pm

  2. Kaushik says I believe that over the next several years oil prices will continue on an upward spike

    A fallacy there, Kaushik… not sure how you arrive at this conclusion. Today’s price incorporates any such expectation… just because oil prices have sky-rocketed in the last few years doesn’t mean they will continue rising. Ex ante, there’s an equal probability of oil prices going down or up..

    Comment by Prashant Kothari — August 25, 2005 @ 12:01 am

  3. Having read a little about the peak oil issue myself, let me explain what are the main uncertainties in this situation.

    Supply numbers are not known clearly. The main suppliers, the saudis, have not had an international audit of their oil wells for a long time now. The market is playing out this scenario of how long the saudis can resist pumping away any extra capacity they have. thus overall, The market is only very slowly coming to a realisation that oil might be peaking, primarily because despite much higher prices, the kind of supply that can bring oil back to even the sham “targetted price” of opec is not visible in the market. If this price of oil is a mania, why isn’t more supply coming into the market?

    If one looks at the market the way it truly is, with information gaps, hunches, herd mentality, etc, one can realise why information will take time to move around. And this is not necessarily a bad thing as it is the basis of entrepreneurship.

    Comment by Prakash — August 25, 2005 @ 3:38 am

  4. there’s an equal probability of oil prices going down or up..

    The fluctuation in oil price is not a random walk. Specifically, note that 5 year oil
    futures were trading at $58 last week, compared to $35 a year ago: link to CNN Money.

    Comment by anon — August 25, 2005 @ 8:25 pm

  5. Prashant:
    There are may different factors at play. There is of course the peak oil theory to which I am somewhat sympathetic. But more important in the short run is the fact that none of the oil majors appear to have invested seriously into exploration over the last so many years. We do not have the bandwidth necessary to meet the any serious increases in demand. No one really knows how the increasing Asian appetite for oil for play out. But as you pointed out, I have not really described my reasons for arriving at that conclusion. I would have a follow up post on the subject.

    Comment by kaushik — August 26, 2005 @ 10:21 am

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