The Central government recently lowered rates of petrol and diesel, the former by Rs 5 and the latter by Rs 2. This was done in the light of the fact that crude prices in the international markets have plunged from $147 to about $42 between July and now.  On the face of it, this lowering of prices is extremely logical and even comes across as being in the interest of the proverbial common man. However, few things can be further from the truth. 

First, the logical fallacy. The reason for the spike in prices was that world industrial capacity was running at full throttle. At the exact same time, global crude extraction had hit a plateau. Ever since about 2005 supply has hovered at about 86 million barrels per day (MBD). The fluctuation in price, between about $50 to $80+ in the period 2005 to 2007, should have brought forth more supply, if there existed any buffer capacity. It did not. Two visits in rapid succession by George Bush to Saudi Arabia this year and fervent pleas to raise output did not help. The Saudi monarch pleaded helplessness in return.  

Saudi Arabia was the swing producer until now, meaning it would vary output to maintain stable oil prices. That they could do little is a clear indicator that supply was at its peak. Demand on the other hand was going full steam ahead. This led to rapid rises in prices. Needless to say, speculative hot money played a big role in driving oil prices further up as consistently rising prices of any financial security, commodity or asset always create a bubble especially if ample, return-hungry, liquidity is sloshing around the global marketplace.

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