Policies to hedge against the exposure to disruptions in supplies and sustained high prices should be complemented by financial strategies.
             In 2005-06, Indian oil imports were $43 billion or 30 per cent of total imports. In 2006-07, the oil import bill is expected to be around $50billion, or about 6 per cent of GDP. At current levels of oil imports, a one-dollar change in the price of oil changes the annual import bill by $800 million. This article discusses strategies to reduce the risk of disruptions in oil supplies and exposure to consistently high oil prices caused by war or other unanticipated politically driven events.
Although opinions vary widely, the Iraq war, which started in March 2003, and the continuing tension in West Asia are estimated to have raised the price of oil by about $10 per barrel. Iraq’s peak oil production before the war was 3.5 million barrels per day (bpd) and now it is about 1.5 million bpd (1 million bpd of production is approximately equivalent to 50 million tonnes annually). OPEC increased production as prices went over $70 per barrel and let us assume that the “extra” production halved the so-called war premium from $10 to $5 per barrel. That is, with all other factors held constant, oil importers paid $5 more per barrel and India’s oil import bill in 2005-06 was higher by $4 billion due to the war.
It is difficult to estimate this war premium with any precision since some of the causal factors are political and cannot be modelled. Exporters are paying a part of it through increased production since it is in their longer-term interest to prevent substitute products from developing. Irrespective of who is bearing what proportion of the enhanced cost, petroleum exporters/processors are receiving a part of the war premium. This can be demonstrated by drilling (pun unintended) down from the country to the corporate level. The net income after taxes and the earnings per share of three global oil companies for the last 10years are shown in the table above.
It can be seen from the table that net income has risen sharply for the three firms from 2003 onwards. Earnings per share have tripled for Exxon between 2000-01 and 2006 and doubled for British Petroleum and Shell. It appears that the tension in West Asia has helped major international oil companies in the near term and probably would not hurt them in the medium to long term. This is not to suggest any conspiracy but to highlight that while war in Iraq hurts oil-importing countries it boosts net income for oil companies. End-results that are so sharply divergent make it that much more difficult to arrive at internationally cooperative solutions.
Some argue that the principal reason for the sharp increase in oil prices in the last few years is the rising demand for oil in India and China rather than the tension in West Asia. In 2005-06, the United States consumed about 1,050 million tonnes of oil, which was 25 per cent of global oil production. In comparison, China consumed 360 million tonnes and India about 140 million tonnes in the last one year. While the growth rates of oil consumption in these two Asian countries are relatively high, their combined consumption is still less than half that of the US. Except perhaps at the margin, India and China remain price takers and not price-makers as far as international oil prices are concerned.
In January 2006, the CabinØÿÿÿvk
