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The International
Monetary Fund has said the persistent increase in oil prices over the
past decade suggests that global oil markets have entered a period of
increased scarcity.

In its April
edition of World Economic Outlook, the Fund says given the expected
rapid growth in oil demand in emerging market economies and a downshift
in the trend growth of oil supply, a return to abundance is unlikely in
the near term.

According to the
reports, “Adverse effects could be much larger, depending on the extent
and evolution of oil scarcity and the ability of the world economy to
cope with increased scarcity. Sudden surges in oil prices could trigger
large global output losses, redistribution, and sectoral shifts.”

After about two
years of gradual global recovery, natural resources are again in the
headlines. Consumption levels of many natural resources, including
crude oil, have already risen above pre crisis peaks, largely
reflecting robust demand in emerging and developing economies.

The price of a
barrel of Brent crude oil crossed the US$100 portal in January 2011.
The prices of many other commodities have also risen to either meet or
surpass their pre crisis peaks, and commodity futures markets point to
further price increases in the next year or two, according to experts.

Oil is said to be
scarce when its supply falls short of a particular level of demand. If
supply cannot meet demand at the prevailing price, prices must rise to
persuade more supply and to ration demand. In this instance, IMF says
oil scarcity is reflected in the market price.

Recommended policy action

The Fund says there
are two broad areas for policy action that economies must consider for
the looming oil scarcity to be tackled.

According to the
report, “At current high levels, commodity price developments and
prospects can have important global economic repercussions. The
increases in the trend component of oil prices suggest that the global
oil market has entered a period of increased scarcity.”

“First, given the
potential for unexpected increases in the scarcity of oil and other
resources, policy makers should review whether the current policy
frameworks facilitate adjustment to unexpected changes in oil scarcity.

“Second,
consideration should be given to policies aimed at lowering the risk of
oil scarcity. If the tension intensifies, whether from stronger demand,
traditional supply disruptions, or setbacks to capacity growth, market
clearing could force price spikes, as in 2007-08,” the report further
said.

It urged policy
makers to strengthen measures to reduce the risks from oil scarcity as
a precautionary step and to facilitate adjustment, if such shifts are
larger than expected.

A persistent
decline in oil supply levels could have sizable negative effects on
output, even if there is greater substitutability between oil and other
primary energy sources.

At the same time,
in the medium term, the oil-induced wealth transfer from oil importers
to exporters can increase capital flows, reduce the real interest rate,
and widen current account imbalances.

The IMF in its
report added that oil scarcity will not inevitably be a strong
constraint on the global economy. However, the risks it poses should
not be underestimated either, as the implications could be important
and far-reaching.

Bismarck Rewane,
managing director, Financial Derivatives Company, a finance research
and analysis firm, said average oil price has increased by 11.6 per
cent to $117.8 per barrel in March.

“The spread between
spot and budgeted oil price has increased by 9 per cent to $44.8 per
barrel. It is expected to trade at an average above $100 per barrel in
April. Oil production remains above two million barrel per day but
declined by 4.2 per cent to 2.08.

“Fear remains about
the sustainability of oil production at over two million barrel per day
due to elections, which might provoke unrest. The turmoil in North
Africa and Middle East is sending oil markets into a frenzy,” Mr.
Rewane said.

“High oil prices
could pose the most significant threat to demand in 2011. Global oil
demand is estimated at 87.7 million barrels per day (mbpd). Growth in
demand is forecast at 1.4 mbpd in 2011. Global oil supply in March is
approximately 88.1 mbpd,” he added.

The Organisation of
Petroleum Exporting Countries (OPEC) has said crude oil output fell by
363,000 barrels per day in March to 29.02 (mbpd), representing a 33 per
cent of global oil supply.

According to him,
increased output of 300, 000 (bpd) from Saudi Arabia is inadequate to
plug the gap, as Libyan oil production dropped by 995, 000 (bpd) in
March.

The uncertainties
surrounding the Libyan situation and political turmoil in the Middle
East has pushed oil prices significantly higher since January.

The Bonny light
increased by 3.4 per cent in March to close at $119.77 per barrel while
the Year to Date (YTD) gain of 23 per cent Nigeria’s oil output
averaged 2.13 mbpd in January and February 2011.