Syed Rashid Husain FUNDAMENTALS are weak. Demand is sluggish and supplies are on the rise – from all around. Market psyche, over the last couple of years or so, has moved from being fearful of the future to a sense on complacency. Yet crude markets are firm. Why? A billion dollar question, indeed. And this has its own ramifications too. "Current high oil prices are a major challenge for the global economic recovery," good, old friend, the IEA chief economist Fatih Birol warned only last week. Not everyone appears too concerned. While Adam Sieminski, the EIA administrator was here in Riyadh a couple of weeks back, he was of the view that the global economy is able to sustain the current market prices. The concern level was low – if at all. And this was despite the fact that prices were within a few dollars of the level that only last summer prompted officials in Washington, London and Paris to worry about the negative impact on their economies, making them to announce the release of crude and refined products from emergency stockpiles – if indeed warranted. Today, the global economy indeed appears more robust than it was six or 12 months ago, though it is still uneven. US presidential and congressional elections are safely past. The pressure on policymakers, at least in Washington, to be seen to be doing something about the rising cost of gasoline and diesel is now much less. Market watchers are keeping a wary eye on these developments, citing two basic reasons for this sense of complacency among the movers and shakers of the crude world on the pricing issue. Seventeen analysts in a recent survey, conducted by Reuters, felt oil exporting countries' budget surpluses was to shrink this year, as heavy government spending and lower crude oil prices trim their economic growth rates. Across the region, governments boosted spending on welfare as unrest gripped the Arab world. And this continues. "Given the uncertainties in the global economy as well as domestic pressures, governments will want to keep spending at fairly elevated levels in order to support growth," Daniel Kaye, senior economist at National Bank of Kuwait, emphasized. Cash flow is indeed required – and in abundance – to meet these expenses. Respected industry friend Morten Frisch of the UK- based Morten Frisch Consulting also appears an ardent supporter of the argument that the growing budgets of major oil producers could only be met if Brent was oscillating at around $110.00 per barrel in 2013. In a study on the Kingdom's 2013 budget, SAMBA noted that actual Saudi spending in 2012 grew by 3.2 percent compared with a whopping 26 percent in 2011. SAMBA said it believes the main increase in spending in 2012 was on the current side, including the extension of unemployment benefit to nationals, adding that project spending was flat in nominal terms and declined in real terms. Washington – for its own geostrategic considerations – is apparently conceding to the very necessity of higher cash flow, staying contented with market behavior, some argue. And then there is a long-term approach to this entire issue too. Current high prices also help sustain the ongoing build up of new resources. These levels make fixed cost on such developments feasible. Oil industry hence wants to ensure higher oil prices - for the time being at least. And Washington sees eye to eye on this too. Indeed to extract oil from sand or shale, or even the offshore developments - all need higher prices. Pushed by rising expenditures, at least some producers seem to be relishing the development, despite the fact that the approach carries long-term adverse consequences for them. New competition is getting on the horizon – courtesy the current market pattern – one can't help underlining here. Pundits are in a fix. They see this as impacting the global economic performance. In a chat with this correspondent, Fatih Birol commented last week, “I agree that current high prices do not affect the US that much and my real worry is Europe, where in addition to increase in oil import bills, we are also witnessing a rapid growth in gas import bills, as they are indexed to oil prices. And this is happening in the weakest chain of the global economy.” However, it would be incorrect, rather unwise, to say that pundits in Washington are oblivious to the rising prices and its impact on average population. Even Sieminski in response to the question of rising prices conceded in a mail that the concern about the impact of oil prices on the global economy is genuine. Referring to the EIA report published last Monday, Sieminski said: “Gasoline expenditures in 2012 for the average US household reached $2,912, or just under 4 percent of income before taxes. This was the highest estimated percentage of household income spent on gasoline in nearly three decades, with the exception of 2008, when the average household spent a similar amount. This means that consumers have less income remaining to pay for other necessities such as food, clothing and housing—and of course, less to spend on other items as well.” And then countering the election argument, Sieminski underlined: ‘Elections in any country have a tendency to focus leaders on issues that are impacting the people, but I think it is fair to say that factors impacting the economy are important at all times regardless of election cycles.' And then, while agreeing to the issue of adverse impact of the rising oil prices, he goes on to accept that the above mentioned EIA report on US household gasoline expenditures suggests that such worries appear well founded. BP Chief Economist Christof Ruehl believes that one of the reasons for the current market attitude is that to many observers, the global economy appears more stable today than in 2011. Hence they are less concerned about oil prices. And then he argues that prices are held up in part because of the lingering fear of supply disruptions (mostly but not only) in the Middle East – despite the huge production growth elsewhere, especially from unconventional resources in the US and Canada. A number of factors seem playing a role in keeping the crude markets on boil. However, in the longer run, it has its pitfalls too. Oil producers need to take a note of it!
