How much effect that actually has on Crude Oil prices remains to be seen and, in any case, currently demand continues to rise. On a slightly tangential note, restricting growth for low energy prices may not necessarily be a wise choice.

The producers’ money-maths too is compelling. Of the 86 million barrels produced every day, about 30 million barrels are produced by OPEC member countries. At a price of US$ 140, the revenues are US$ 4.2 Billion – per day! And that on a product where the cost of production in these countries is less than US$ 15 per barrel on average. Which explains why it is so difficult to convince them to increase production just so that prices come down.

All these factors make for serious uncertainty and all markets hate uncertainty and convert it into volatility which can singe the deepest of pockets. Look at the Indian situation. We produce roughly 700,000 barrels of oil and import about 2 million barrels a day to meet our requirements. Therefore, our import bill at current prices excceds US$ 280 per day or close to US$ 100 Billion a year!

Suddenly our reserves of US$ 300 Billion plus don’t seem like a lot. Therefore it is necessary for us to raise prices of petroleum products and curtail subsidy because demand will not reduce if prices are kept artificially low and in fact it encourages misuse. If India continues to grow at 8% for the next decade it will require an incredible amount of energy with projected Crude Oil imports of US$ 1 Billion a day! A radical approach and a firm hand will be required to fuel that growth.

Subsidy has become a political necessity but is the enemy of economics leading to further wastage and less investment. Speculation too has been blamed but inventories haven’t gone up and in the absence of data, the link is tenuous at best. US$115 seems low compared to the spike of US$ 147 per barrel but it is still historically very high and likely to remain so because of the basic demand-supply issues.

Demand is being driven by growth in China and India and supply issues are being highlighted. World GDP continues to grow at well over 4% and the negative growth and oil consumption of developed countries is more than balanced due to business expansion in developing countries. In this scenario, the only thing that can spook the crude prices is a consistently strong US$ - which is an unlikely scenario right now with the US battling recession as well as the well-documented subprime housing finance crisis. Therefore the stage is set for crude oil to remain above US$ 100 per barrel for the next year unless economic uncertainties erode demand considerably. But if the fall in crude prices is due to reduced growth, that may be a decidedly worse option.

Jayant Manglik is head, Commodities at Religare

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