Crude Realities - Oil Shock threatening global slowdown!

Crude has touched US$135.09 on 22.05.2008, and hovered around 133 level for 2 days, and the Goldman Sachs report suggesting that the same can reach 150$ levels shortly, and even 200$ in an year sent jitters among global markets, economies. Governments and regulators started assessing the possible impact on inflation, which is already at highest levels in the past 4 years. The issues responsible for this doubling in just one year time are many:
1. Weakening of US $ due to economic slow down being experienced in US economy, ever since 'sub prime crisis' surfaced in October 2007, which has shaken up large players in their financial system.
2. While global GDP is growing at 3 to 4% a year, the demand for the commodity too grows at similar pace, if not more, where as overall increase in production world wide is just 1% as no new oil fields are added in recent past. This natually, widens demand supply gap which pushes price.
3. India and China which are growing above 7% p.a. do subsidise the use of petroleum products, where the demand is growing, and are large importers, as domestic production is way below the consumption.
4.These two economies facing higher inflation are not passing the actual price to the end users, which continues to encourage the people to consume more, and thus, more demand.
5.India specific issue is, most of the oil marketing companies are under public sector, where the prices are administered since 2004, though an attempt was made during 1999 to 2004, to move towards, market determined prices, by NDA government. Private players like Reliance Industries, Essar etc., who made investment in retailing owing to government policy on liberalisation in NDA rule, are not treated on par with PSU companies for receiving compensation, to sell at subsidised prices.
6. Current prices of Petrol, Diesel, Kirosene and LPG are fixed when indian crude basket was around US$67, where as same has moved beyond 117 already. Government came with Oil bonds to PSUs to compensate partially, where as private players were left out. This forced Reliance Industries to close all retail outlets(owned) numbering about 1400 recently, which shifts the demand to PSUs again.
7.IOC india's largest player has posted Q4 losss of Rs.400 crores and says cannot import crude at current prices, due to cash crunch beyond 15th September 2008, and suggested number of measures to Oil ministry to help to tide over the situation, one being 'rationing', which due to political sensitivity for current UPA government already under trouble/pressure due to raising inflation, in an election year, is not accepted by it.

Then what is the solution? It is a complex problem, which needs to be addressed from various angles, taking firm and if necessary hard decisions.

What is being done by the Government will be known by this weak end as Cabinet meets on this issue shortly, and how it will impact shall be discussed in the next posting, along with what need to be done too.