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India is no better off. Its net oil import bill, that is oil imports less petroleum products exported, stood at $33 billion in 2006. The current year will see its rapid rise to about $40 billion.
Although China can afford to pay this heavy burden, thanks to its huge trade surplus, India is in a precarious position. India's only solace is that Indians working in the Middle East send large remittances of U.S. dollars, which keeps the pain a bit manageable.
The current crude price rise began with the second Gulf War in 2003. The United States wished to grab Iraqi oil for itself, but the whole exercise backfired. Middle Eastern oil producers, together with Russia and Latin American countries, very cleverly manipulated oil prices. They began to hold on tight to the oil tap and blamed it all on spiraling demand in the United States, Europe, China and India. They particularly targeted the United States for the rise. This was the Arab world's punishment for the U.S. invasion of Iraq.
Poor and developing countries got sucked into this vicious tit-for-tat cycle. They began losing whatever they had in their treasury to the oil producers.
The United States is not immune to the rising prices either. Prices at the pump doubled from 2004 to 2007. Everybody in the U.S. Main Street knows that the root cause of this price rise was the second Gulf War. Although the common man has been hurt, he has not mounted any vociferous challenge to U.S. policy in Iraq. It is a pity that U.S. citizens have only mildly complained but have not demanded a change in U.S. policy.
Who is gaining all this wealth that is being sucked into the oil producers' pockets?
The United States and the Europeans have gained the most from the oil producers' increased revenues. All these petrodollars are deposited in U.S. and European banks as investments. Some of these monies are used to pay for the yearly service contracts which the Americans and Europeans signed previously to service hardware. Other portions are used to import everything from food and clothing to bricks and mortar to build infrastructure.
Unfortunately for the Westerners, the value of these contracts has not risen as fast as oil prices have; hence the current advantage belongs to the oil producers. The only solace the West has it that they have the oil producers' money.
The Indians and Chinese gain a bit also, with dollar remittances for the former and merchandise exports for the latter. But it is nowhere near the hole in the pocket the $100-a-barrel oil causes.
This is not the first time that oil exports have put tremendous sums of money in Middle Eastern sheikhdoms' pockets. About 30 years back, in 1973, oil prices rose because of the Arab-Israel war. At that time also Middle Eastern producers sucked up all the world's money in just four years, from 1973 to 1977.
It has been estimated that Middle Eastern sheikhs had about $400 billion in cash on hand in 1977, which they had no idea what to do with. This much money was about half the value of the U.S. capital market. With this much cash they could have purchased half of corporate America. But they did not. Instead they built marble palaces and water fountains in the desert, purchased fighter planes and peddled influence around the globe. Today's Muslim insurgency all over the world had its beginning in surplus cash which found its way into funding fundamentalism.
How much cash have Middle Eastern sheikhs collected in the last three years?
Estimates vary as to how much money has been transferred to the Middle East to pay for oil imports. In the four years from 2003 to 2007, close to $1.54 trillion in payments has been made in dollars to the Gulf Cooperation Council, consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Of this, about $1 trillion has been paid back for imports and service contracts. This leaves roughly a $540 billion surplus, which is either being horded or has entered the world capital markets in the ownership of stock, real estate and foreign direct investment.
India's share over three years is about $60 billion in the form of remittances by Indian labor and essential imports. China has gained a similar amount with its merchandise exports. But the returning gains are nowhere near the payments that have been made to import oil.
Don't forget Russia. Yesterday's poor, broken and disheveled Yeltsin's Russia is today's prosperous, energetic and internationally influential Putin's Russia. Oil has done a job to its fortunes. Russia is the second largest producer of oil after Saudi Arabia. Its gas exports to Western Europe are setting records and earning more dollars. It is estimated that with $100-a-barrel oil, Russia can pull in anywhere from $500 million to $700 million a day in oil exports. It is awash with cash. Very smartly Russia is spending money to fix its decades-old infrastructure. Also, it is relatively poor; hence this cash is coming handy to uplift Russia's masses into a higher income group.
What can the poor Indians and Chinese do in the meantime?
Their choices are very limited. They have to pay even if they are not party to the problem of rising oil prices. China is well placed to use its pile of cash in U.S. banks. Any money paid to the oil producers from the Chinese cash kitty ultimately gets deposited in U.S. banks. For the United States, all dollar-to-oil transactions are cash neutral, except that the ownership of the dollar changes in favor of oil producers or China. The United States feels comfortable with this arrangement, as nobody will ever dare to come and collect their money and take it home.
India has very little flexibility. Its exports are meager; its returning money via remittances is not enough to balance out payments for oil imports. Petroleum products export gains do not come close to balancing all that cash paid out for oil imports. Hence, India borrows from the open market to finance its imports.
Sometime in the distant future, when export earnings go significantly high with added petroleum refining capacity, additional cash generated with this, together with remittances and essential item exports, may be able to balance out the high oil import costs. But that will take time.
Now the pain of oil prices has reached its crescendo. Consumers both in the West and in the developing world will not be able to tolerate it for long. Then anger will find its way into the streets. Just as the country's youth forced the United States out of Vietnam in 1975, consumers will force the country out of Iraq.
Oil prices then will plummet and find a new stable level. The world will readjust to a new reality much below $100 a barrel. When the oil tap runs out, nuclear, solar and cold fusion energy will take over. The Arab sheiks, devoid of incoming cash, will abandon their marble palaces and go back to their age-old tents.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
