US finds smart way out for energy crises

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Fluctuations in the crude oil prices have both direct and indirect impact on the global economy. Therefore, the prices of crude oil are tracked very closely by investors over the globe.

An increase in oil prices results in an inflationary situation, negatively impacting the global economy, particularly oil-dependent economies such as the U.S. Higher crude oil prices directly affect the cost of gasoline, home heating oil, manufacturing and electric power generation in America. Apart from increased transportation, heating and utility costs, higher oil prices are eventually reflected in virtually every finished product, as well as food and commodities in general.
The US has enjoyed inexpensive oil-based energy for nearly a century, and this is one of the prime factors behind the prosperity of the U.S. economy in the 20th century. While the U.S. accounts for only 5% of the world`s population, it consumes 25% of the world`s fossil fuel-based energy, in particular, oil. About 75% of this consumption it imports from other major oil suppliers.



It wouldn`t be wrong if said that US along with other oil producing- consuming countries has been responsible for dragging the oil prices to levels of uncertainty and risk.

Crude oil prices have continued their downward trend in the month of September 2008 with the OPEC Reference Basket declining more than USD 42/b or roughly 30% in the space of two months from a peak of almost USD 141/b reached in early July (Source :OPEC Monthly oil market report).

By the second week of September, the Basket price had fallen below the USD 120/b mark and currently stands close to USD 100.64/b pressured further by the fallout from the financial sector. Futures market activity has declined in parallel. The strengthening of the US dollar, with a strong correlation to crude oil prices, was also an important factor in relieving some of the upward pressure on oil and other commodity markets. This shift to bearish market sentiment has been precipitated by a growing awareness of weakening fundamentals, mainly due to deteriorating economic prospects, the continued decline in oil demand growth and improved supply situation.

Financial sector turbulence continued leading to a government takeover of troubled US mortgage lenders Fannie Mae and Freddie Mac, the sale of Merrill Lynch as well as to the collapse of Lehman Brothers, the fourth largest US investment bank. Recent data in the US show a sharp rise in the unemployment rate in August, while the housing sector downturn is still to reach bottom as seen from the recent fall in pending home sales in July.

Propelled by mounting anxieties over soaring oil costs, the US government is researching on alternatives sources which would make the US economy self sufficient in terms of energy generation. The US policy makers have marked bio fuels as an alternative energy option against gasoline keeping hope that it might help reduce the dependence on imported oil in the long run. Ethanol boom has created rural jobs alongside enriching some farmers in the agribusinesses in America.

According to United states Department of Agriculture (USDA), U.S. ethanol production stood at 3 billion gallons in the first half of 2007 which was 32% higher in comparison to the corresponding period last year. As on Aug. 29, 2007 there were 128 ethanol plants with annual production capacity totaling to 6.78 billion gallons, and an additional 85 plants were under construction. U.S. ethanol production capacity is expanding rapidly and is expected to exceed 13 billion gallons per year by early 2009. There were over 6 million flex-fuel vehicles (FFV`s) on the road which are using E85 technology in the United States and research is going for E65 and E100.

Most of the oil producing countries import food from US, Australia, European Union (EU) and all these countries are converting their energy base from Petrol, gasoline to E15, E65 and E100. This rising biofuel production will generate food demand for corn and rapeseeds oil, in particular, spilling over to other foods through demand and crop substitution effects. Likewise the macro economic factor, the growing demand will make food commodities costly for the importers, thereby indirectly benefiting the US economy as it will gain leverage by becoming self sufficient in generating more and affordable energy.

Emerging economies such as China and India would be least influenced by it. Though these counties are developing, they lack in terms of modernized technologies of ethanol and other energy sources. Though India has sufficient oil reserves and a huge source of ethanol from sugarcane, the country fails to utilize it optimally. Out of the total oil consumption of India 70% is met through imports. Despite of availability of ethanol, India is way behind in becoming self sufficient on energy grounds due to lack of ethanol development and car technology.

Looking at the volatility in prices, it is difficult to predict the trend for the near to medium term period. One group of analyst`s expect that the increasing usage of alternative energy and on going economic turmoil may cap the demand for crude oil in coming future. Another group is of the opinion that the energy price would moderate in future on geopolitical uncertainty among Middle East counties, US economic slowdown concern and anticipatory actions by market speculators.

But the energy sector is still lighting hopes as India, China and other emerging economies have recently entered the energy-intensive phase of their economic growth cycles, and they are all investing in producing more energy and infrastructure that go along with it.
So there will still be money to be made by investing in oil producers, drillers and support companies. But the biggest growth and the best opportunities will be in alternative energy resources as it will drive the future growth.