Navtej Kohli on rising oil prices

Navtej Kohli shares his concern about the rising oil prices. Oil is not cheap anymore!

Oil prices have increased by almost 280% for the past five years, and the market has become increasingly seasonal and volatile. In 2007, for example, the commonly used benchmark, West Texas Intermediate (WTI) crude, averaged close to $72 a barrel, and its range was between $50 and $100 a barrel.
Since the beginning of 2008, oil prices have set several records. And recently they hit another new level - crude-oil spot prices and oil futures reached nearly $120 a barrel. This latest spike in prices was due to the earlier minor disruptions in oil production - the Nigerian rebel group attacked oil pipelines in the region, and a Japanese oil tanker was struck off the coast of Yemen.
The recent increases in oil prices are due to a slowdown in oil-supply growth and the surging demand from developing countries, in particular China and India.
A falling US dollar has also pushed up the oil price, since oil is traded in the currency. Other factors include speculation on the oil futures market, increasing risk aversion and market uncertainty from the recent US credit crunch, and geopolitical threats in the Middle East.
However, the main concern remains consumers' purchasing power, and not so much the rising oil price itself. Increases in the price of oil are like a tax increase, affecting mostly low- to middle-income households. Economic growth depends on stronger consumer spending to keep the economy going. If consumers are made poorer (or feel poorer) by higher oil prices and cut back spending, growth forecasts may not be as good as predicted.
Going forward, WTI prices are projected by several research houses to average in the range of $90.50 to $101 a barrel in 2008 and $80 to $92.50 in 2009, provided that there is no further sharp dollar decline and severe geopolitical tensions. Although the oil market seems to be coming down, it will remain at a high level.
The era of cheap oil is over. A new paradigm of thinking about energy is, therefore, essential. We should not be too concerned about short-term fluctuations in oil prices, but focus more on medium- to long-term solutions. Conservation and efficient use of energy are perhaps the best policy choices at hand, but the government should also seriously explore alternative energy options and make decisions.