It is official - the oil price rise is real and here to stay for much longer than what others might have thought when the Middle East crisis was taking shape. Initially, there were efforts to minimise the Libyan threat to oil prices, by citing its relatively not-so-significant strength to dictate oil prices. But the price movement has defied all those appeasing statements and, as feared by many, global oil is ready to take-off further north.
"Oil could touch $150/bbl and soon. The threat is real and the reasons are fundamental, unlike 2008. We may not see oil below $90/bbl for a long long time...as$120/bbl might be the new average range from here on," Boone Pickens, Chairman BP Capital LLC told Bloomberg.
His concerns are echoed in other corners as well; Adam Sieminski, chief energy economist at Deutsche Bank AG, also believes the oil prices to be in no hurry to revert to double digits adding that the Libyan unrest should be given more premium than what the market has already given.
There seems to be emerging consensus amongst energy observers around the globe that it is time to attach a war premium to oil prices as it is more than just about demand and supply dynamics.
The premium could range anywhere between $10-15/bbl for the Libyan unrest alone -the market can safely add a potential $10/bbl if the crisis spreads to Algeria or Bahrain. The premium to Saudi Arabia would be much higher, although the chances of Saudia being affected appear remote.
What is also keeping the oil prices up are the concerns regarding Saudi Arabias much-talked supply reserves. Many energy economists believe that Saudi reserves are overstated by as much as 40 percent, something which the Wiki Leaks cables also revealed. Even if that is brushed aside, the quality aspect of Libyan oil cannot be compensated by pouring in more oil - as Libyan oil is believed to be light and sweet.
What the scenario holds for Pakistan is the tricky question. It seems that the Minister for Religious Affairs, Khursheed Shah, has a grip on the situation as he recently cautioned Pakistanis to brace themselves for a further hike in petroleum prices. From an economic perspective, this better be the case as Pakistan can ill-afford anymore political point scoring in this regard.
The Finance Minster too has recently stated that political motives will not be allowed to overtake economic rationale, something which has eluded the government thus far. The trade deficit can be expected to rise as import bill steps up - negating the impact of the record-high export growth.
But for the fiscal deficit to be within the range of 5 percent, as reiterated by the Finance Minister, the government cannot hold back the rise in oil prices any further. One wonders if Zulfiqar Mirza has been assigned the role by the finmin as he continues to irk MQM, which has again threatened to leave the coalition. It may not be a bad thing, when the time comes for tough economic decisions.