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Rising crude prices put world in danger of stagflation

business Updated: Jun 27, 2008 20:36 IST
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Global crude oil prices leapt to a new high of $142 a barrel on Friday, sending stock markets into a tailspin and fueling concerns that the world economy might slip into a sustained period of low growth and high prices.

Governments and policymakers across the world are confronting the same challenge on the back of a relentless rise in crude prices, but in India's case the pinch is bigger as the country imports nearly 75 per cent of the crude it needs to keep its economy going.

“The world economy is seeing the greatest risks of stagflation since the 1970s, which seriously complicates the jobs of central banks around the globe,” said Yiping Huang, a Hong Kong-based analyst with Citigroup Global Markets.

Oil prices have more than doubled from $70 a year ago on back of rising demand, speculative trading and ongoing geopolitical conflicts that have disrupted supplies.

Research has shown that between 1997 and 2008, aggregate world demand for crude has increased by 18 per cent while supplies increased 15 per cent.

“The bulk of the increase in demand has come from China and other developing countries," said Anmol Agrawal, an analyst with IDBI Gilts. An economic boom in these economies has led to a surge in consumption of fuel and they accounted for 83 per cent of the incremental demand worldwide for crude in the past 11 years.

India has already asked oil-producing countries to move against what it called speculation pushing up prices of crude.

“There is need for the oil industry to reassert its leadership in price formation and not remain a passive spectator of speculation and paper trading in oil,” Finance Minister P Chidambaram told members of Organisation of Petroleum Exporting Countries (OPEC) at a meeting in Jeddah recently.

At that meeting, the minister suggested a price band mechanism where consuming countries guarantee a lower limit and producing countries pledge to keep prices below an upward ceiling to prevent volatility in global prices.

US lawmakers on Thursday approved a legislation that empowers the Commodity Futures Trading Commission (CFTC) to "curb immediately" the role of excessive speculation in energy futures markets.

The Indian government faces the twin challenges of containing the import bill and maintaining retail fuel prices at reasonable levels to prevent political backlash in an election year.

It has recently increased retail prices of petrol and diesel by Rs 5 and Rs 3 per litre to prevent the crippling finances of state-owned oil marketing companies from deteriorating further.