Monday, August 8 2005 11:37 Hrs (IST) - World Time -

What's common to the rise of oil prices in Delhi, the recent elections in Iran and a recent report by the financial consultancy firm Goldman Sachs?

In three words - Impeding Energy Crisis.

The Goldman Sachs report envisages an oil price 'superspike' which will push oil prices up anywhere from 80 dollars a barrel to a 120, with the most likely scenario pushing up oil prices to about 105 dollars a barrel. This will hit major oil importing economies like India and China really hard.

A third of current oil prices are currently attributed to speculatory inflation, well above the base price of the oil. This is reflected in the recent petrol price hike in India and in the gradual but steady rise of petrol costs in the past couple of years. It has seemed gradual at any rate, because in India, the Government cushions the consumer from fluctuating rates through the Oil Pool Deficit. But with a super spike in the price of oil, this will no longer be possible and the booming Indian economy will suffer a huge recession. If that's any compensation, so will other major oil importing economic powerhouses, including China.

When could this super spike happen? Anytime now. Currently the world's oil supply is pumping at full capacity and is just about managing to keep ahead of demand. When winter sets in, demand will easily outrun supply. And if the fragile political situation in Nigeria or Venezuela or Russia or in parts of the Middle East deteriorates, then a superspike could happen overnight.

The report comes down hard on the 'gas guzzling' habits of United States (US) consumers. "Perhaps the ultimate answer to how high oil prices need to go before demand destruction occurs is derived from knowing when American consumers will stop buying gas-guzzling sport utility vehicles (SUVs) and instead seek fuel efficient alternatives. We estimate that US gasoline prices may need to exceed $4 per gallon."

They also blame oil producers for lack of investment in further refining and extraction facilities. "Geopolitical turmoil in key oil exporting countries coupled with populist rhetoric keep foreign oil companies from developing host country resources in a timely manner that could otherwise meet oil demand growth at lower prices." So even though the world isn't running out of oil and gas, the world economy is currently running out of options.

The report is particularly bleak about the Middle East's role in boosting oil and gas production. It says, "It is important to remember that the Middle East has been one of the few areas in the past 30 years to experience massive population growth - 2% to 3% per annum."

"The combination of rising populations, a lack of a diversified economic base, and the existence of Governments that are not representative of, or responsive to, underlying populations all point to ongoing geopolitical turmoil and an inability to meaningfully add to oil supply."

"Persistent high prices are improving the financial position of key oil-exporting countries and could serve to keep potential revolution at bay. If future political crises are to be averted, we believe it is critical that oil-exporting countries reinvest cash inflows [to] allow the majority of their growing populations to have economic hope."

Geopolitical turmoil in Iran

Coming to the recent Iranian elections and the dark horse victory of the radical candidate Mahmoud Ahmedinejad. The elections have been mired in controversy, with thousands of reformist candidates being barred before the elections by the non-elected clerical grand council. It is the first time that an Iranian Presidential election has gone to a second round. This election has also reversed the trend of elections bringing increasingly moderate Presidential candidates forward since the Iranian revolution.

Since the elections, Mahhmoud Amedinejad has been associated with terrorist activities by the American and Australian Governments and media, including being one of the hostage takers at the US embassy in Tehran. His past as a Revolutionay Guard and as a secret agent for Internal Security does not inspire confidence. (But the george Bush, Sr. used to head the CIA.) However, the actual Presidential elections, despite allegations of rigging, seem to have been fair, despite abysmally low turnouts.

If we assume that there was, even if limited, public choice in Mahmoud Ahmedinejad's victory, then we are left with the question, why? Why did he defeat the reformist candidate and former President, Hashemi Rafsanjani, by getting a landslide 62 percent of the vote? His landslide victory was secured on a manifesto that focussed on domestic issues like eradicating corruption, ensuring greater employment and raising the living standards of the poor.

Ahmedinejad's support was swelled by disappointment at the poor performance of reformers and the way in which corruption infected the state under their administration. For the young people, who make up 70 per cent of the population, job opportunities and an improved quality of life are the biggest concerns. For all the debate over freedom and democracy, it was the economy and the social justice that mattered most to voters.

It is important to note that unlike in the early days of post-revolution Iran, America is not the 'Great Satan' in Ahmedinejad's foreign policy rhetoric. Considering that there is a strong US military presence on two of Iran's borders (Iraq and Afghanistan), and considering the increasing bellicosity of the US Government's anti-Iran rhetoric, his position is rather blasé, verging on ignoring America entirely. "America was free to sever its ties with Iran, but it remains Iran's decision to re-establish relations with America."

Ahmedinejad's campaign exploited widespread resentment at the growing gap between rich and poor. He played up his working-class roots and vowed to increase aid to the needy and to young families across Iran. His experience as mayor of Tehran was helpful in this respect, since Ahmedinejad was able to project himself as a populist public servant, in touch with bread-and- butter issues such as unemployment and housing.

How does he aim to implement his reformist agenda? By ensuring that the benefits of Iran's oil and gas rich economy are distributed more equitably among its people. If we look at the Iranian elections through the perspectives of economics rather than 'freedom' versus 'terror', then this is exactly what the doctor (or Goldman Sachs) ordered.

"If future political crises are to be averted, we believe it is critical that oil-exporting countries reinvest cash inflows [to] allow the majority of their growing populations to have economic hope."