Increasing oil price in the world market:

Is oil or the economy to be blamed?

by Indeewara Thilakarathne

As the price of oil rises, its overarching effects is felt on the global economy triggering a rise of commodity prices, increasing inflation, interest rates and also affecting people's spending habits and share markets across the globe.

The price of oil is, by and largely, determined by supply and the demand. Though the current level of production (about 2 million barrels a day) would not double due to various factors such as political instability in Nigeria, Venezuela, Russia, Middle East and the Gulf of Mexico, demand for oil will not be decrease in the foreseeable future mainly due to China's increasing demand for oil and the demand created by emerging Asian economies such as India.

Although the strong economies such as US, Japan and Singapore may resilient to inflationary pressure exerted by the continous rise of oil prices, Sri Lankan economy will react in much worse manner given its dependency on oil for energy and transport needs.

Consumers are already feeling the effect of hyper-inflation which is currently around 17 percent.

According to Dr. Chandana Aluthge, a Senior Lecturer in Economic at the University of Colombo, economic mismanagement is more to be blamed for the higher inflation rate than the rise of oil prices in the world Market.

"For some officials, this is a blessing in disguise. So they can cover their sins in rising oil prices which is a convenient way out" said Dr. Chandana Aluthge referring to the rise of price level in the market.

He is of the view that the entire burden of oil price increase should not have been handed down to consumers as in the case of increase in bus fair and essential food items.

It should, in fact, be distributed among the consumers evenly so that it want feel hard.Government intervention to take measures to cushion out the effect of hyper inflation is necessary in order to protect the consumers.

However, it should be stressed here that long term measures such as introducing alternative energy sources like bio-gas, solar power even at domestic level, should be adapted help lessen the oil dependency for energy needs. Currently, oil is being used as a supplementary source of electricity generation.

Given the surge for electricity both for domestic and industrial use, it is imperative that Sri Lanka should move towards using alternative energy sources. Major structural adjustments in the energy sector is an immediate need especially against the rising oil prices.

Alternative energy sources such as bio-fuel, solar and wind can be harnessed in order to reduce oil dependency for power generation.Another vital sector that contributes to increase in price levels is the transport sector.

In Sri Lanka, transport sector is entirely dependent on oil. The rise of prices of oil will eventually trigger an instance price increase in almost all the goods and services in addition to bus and railway fares.

With the cost of transport being added to good and services, the price levels of essential goods such as food items, vegetables will rise. This will adversely affect the industrial sector including garment sector.

As the cost of production increases, the cost will be added to the finished products thereby increasing the price tags for most of the garments manufactured here in Sri Lanka. This would, in turn, reduce demand for Sri Lankan products in European markets including in US. US consumers have already reduced their spending.

Though there is no short term solution in addressing the issues in the transport sector, the only way out seems to be in the use of mass mode of transports in an effective manner. The railway sector will have to be further developed to make an optimal use.

Though it may be costly at the initial stage, the Electric train can be a viable alternative to diesel engines and could effectively utilize to transport goods from and to major cities and also as mode of passenger transport.

In addition, bio-fuels and alternative energies such as solar-powered vehicles for short distance use like in a city can be introduced. In essence Sri Lankan economy, its inherent structural flaws, oil-dependent energy and transport sectors are more to be blamed for the present crisis in the economy and than mere rise of prices of oils.

[email protected]