The warning by President Vladimir Putin of Russia on Thursday that crude oil prices could soon reach the US$ 100 per barrel mark has sent shockwaves among the leaders of all countries and top economists. One cannot ask for a more authoritative source for such a prediction, as Russia is one of the top oil producing countries with vast reserves that could last for around 100 more years.
This is not the first time that this prediction has been made, but Putin is the first Head of State of an oil producing country to say so. There are several reasons for the predicted increase. A colder winter could drive up demand for oil. Record-high natural gas prices are forcing some utilities to switch to oil derivatives instead, boosting demand for crude. The third factor is the reopening of international airline travel with the pandemic on the wane. But the experts agree on one thing – oil at US$ 100 a barrel could trigger the next economic crisis. As it is, with oil hovering around US$ 85 per barrel, most world economies are in a tailspin. One can only imagine what could happen if the US$ 100 threshold is passed.
But that is not the end of the story. Expect the high prices to stick around for many more years as demand rebounds while supply remains tight. Goldman Sachs Bank’s head of energy research, Damien Courvalin said market fundamentals warrant higher prices and that the Bank’s forecast for Brent crude is US$ 85-100 per barrel for the next several years. This is bad news for all economies, especially emerging economies such as Sri Lanka which are net importers of oil.
The crux of the matter is that we might never again see oil at just one US cent per barrel (as witnessed at the height of the pandemic last year) or even at US$ 50-60 per barrel. The only silver lining is that Russia and its allies in the OPEC+ want a stable oil market without any shock spikes in prices. “Russia and our partners and OPEC + group, I would say we are doing everything possible to make sure the oil market stabilises,” Putin said, according to a translation.
The OPEC+ group decided last week to stick to their planned 400,000 barrels per day (bpd) increase in collective production in November, despite calls from oil importing nations to add more supply and despite an expected additional demand from a gas-to-oil switch due to record high natural gas prices in Europe and Asia. The rest of the world cannot do much in this case, as OPEC+ is a cartel that decides prices and production, other than finding avenues to reduce their dependence on oil.
Most Asian economies including Sri Lanka are known for their petroleum subsidies, which are aimed at sustaining the goods and passenger transport industries. But all indications are that this is an expensive proposition that cannot be carried on any longer in the pandemic-induced economic downturn. In countries such as Sri Lanka, the nationalised petroleum distributors have also been racking up huge losses, partly due to overstaffing, inefficiency and providing fuel on a loan basis to other Government entities.
In Sri Lanka, institutions such as the Ceylon Electricity Board (CEB) and Sri Lanka Railways (SLR) owe billions of rupees to the Ceylon Petroleum Corporation (CPC). Add the subsidies for diesel and kerosene to this volatile mix and we have a situation where raising prices at the dispensing pump is the only answer in the face of rising world crude oil prices.
Sri Lanka spends over US$ 5 billion per year for petroleum imports, a bill exacerbated by the country’s lack of refinery capacity, which means it has to import petrol and diesel in finished form at a higher cost instead of importing crude and refining it. The time has come to think seriously about whether this is sustainable in the long term, even if the economy recovers from the pandemic. The Government must urgently devise strategies to veer ourselves away from oil to the greatest extent possible. This cannot be done overnight, but a 15-year window could give ample time.
Contrary to popular belief, it is not transport that is responsible for the biggest slice of fossil fuel use – rather, it is power generation. This is why we must move away from thermal power generation as soon as possible. The Government is moving in the right direction in this regard, with a target of 70 percent of power generation using renewable energy (solar, wind, hydro, geothermal and even ocean wave) by 2030, just nine years away. All concessions and incentives must be provided to private sector companies willing to invest in these renewable sources.
It is also imperative to move into electric mobility. The Government has already decided that once the import restrictions on vehicles are lifted, priority (and possibly concessions) will be given to the import of electric vehicles. This is a step in the right direction that will help the Government to achieve the aim of having a majority of electric vehicles on the road by 2035. However, the authorities must ensure that the national grid is not used extensively to recharge the electric vehicles.
Otherwise, the whole purpose of moving into electric vehicles will be negated. Rather, the installation of solar chargers must be encouraged. But all should strive to save oil as much as possible to reduce the fuel bill. Even the simple act of switching off an unneeded light bulb can make a difference. Amplified throughout the country, it can lead to a big change.