The year 2005 witnessed the completion of the principal pipeline meant for carrying oil through Georgia, and sparked off jubilation in the United States which saw it as a major success in its foreign policy in terms of securing an alternative source of fuel. The construction of the pipeline meant that oil produced in Central Asia could be made available to the West, thus weaning it away from its dependence on the Arab countries. It also meant that the Americans could now ignore Russia for its oil needs- a much-cherished objective for the United States.

Bureaucrats in the United States who were responsible for framing policies were optimistic that circumventing Russia in terms of oil supply would deter the latter from reestablishing dominance over Central Asia and its stupendous oil and gas reserves. It could also mean a better and also less risky way of getting oil without interference from Moscow which had always maintained a vice-like grip over export channels- a legacy of the Soviet era. The tussle with Moscow seemed to be the modern version of a 19th-century competition for one-upmanship in the area, called the Great Game.

During the 1990s the American diplomats distributed advertisement material in the Central Asian region, which spearheaded US attempts to gain allies there, which carried the following message: “Happiness is multiple pipelines.” This message also summarized American strategic plans for the region.

Oil pundits express the opinion that a state of war between Russia and Georgia could jeopardize US efforts to tap into Central Asian energy resources at a time when record Asian oil demands coupled with diminishing supply jacked up fuel prices to oppressive levels.

“It is hard to see through the fog of this war another pipeline through Georgia,” according to Cliff Kupchan, who worked in the State Department during the tenure of Bill Clinton and who advised Eurasia Group in the realm of political risk-taking. “Moving forward, multinationals and Central Asian and Caspian governments may think twice about building new lines through this corridor. It may even call into question the reliability of moving existing volumes through that corridor.”

Experts fear that renewed Russian enthusiasm in taking control over the region’s geopolitics could play a significant role in fashioning the energy landscape there.

After the demise of the Soviet Union, during the 1990s, concerted American attempts were engineered by Bill Clinton in order to secure control over crude in the Caspian Sea. The Georgian pipeline, otherwise called the Baku-Tbilisi-Ceyhan line (BTC for short) marks a watershed in the positives of American strategic thought for the region which has never relented in trying to estrange the countries of Central Asia from Russia. These countries had earlier been under the Soviet regime before getting divorced from it when the USSR broke up.

Certain observers believe that hostile posturing between Russia and Georgia is not just an extension of their traditional rivalry, but is more an offshoot of Russia’s misgivings that Georgia, which is pro-West ideologically, could turn out to be a long-term competitor in the business of fuel exports.

“Russians treasured the fact they had a monopoly on oil and gas pipelines from Central Asia, as it gave them considerable clout,” observed Marshall I. Goldman, an expert on Russia at Harvard and who recently authored “Petrostate: Putin, Power, and the New Russia.” “By agreeing to having an oil pipeline, Georgia made itself more vulnerable.”

A major concern is about what will happen to Kashagan oil, Kashagan being a major oilfield in the Caspian Sea which oversees reserve oil to the tune of over 10 billion barrels. Situated close to Kazakhstan, Kashagan has been the theater of energetic activities by Western corporates, in recent years, in their endeavors to tap new sources of Caspian oil.

The overall scenario appears grim in the region as Russia flexes its military might against a pro-Western and less armed Georgia which might translate to a choking off of oil flow for the hapless importers. Thus one cannot expect, at least in the short to medium term, and unhindered supply of affordable oil from Central Asia. An ominous and unpleasant geopolitical game of one-upmanship patronized by an unrelenting Russia, laced with the specter of unnecessary bloodshed, is set to dash all hopes of doing business in the region by an oil starved West. Against such a backdrop, it appears that there is hardly much that one can do except continue to buy more expensive Middle Eastern oil.

The year 2005 witnessed the completion of the principal pipeline meant for carrying oil through Georgia, and sparked off jubilation in the United States which saw it as a major success in its foreign policy in terms of securing an alternative source of fuel. The construction of the pipeline meant that oil produced in Central Asia could be made available to the West, thus weaning it away from its dependence on the Arab countries. It also meant that the Americans could now ignore Russia for its oil needs- a much-cherished objective for the United States.

Bureaucrats in the United States who were responsible for framing policies were optimistic that circumventing Russia in terms of oil supply would deter the latter from reestablishing dominance over Central Asia and its stupendous oil and gas reserves. It could also mean a better and also less risky way of getting oil without interference from Moscow which had always maintained a vice-like grip over export channels- a legacy of the Soviet era. The tussle with Moscow seemed to be the modern version of a 19th-century competition for one-upmanship in the area, called the Great Game.

During the 1990s the American diplomats distributed advertisement material in the Central Asian region, which spearheaded US attempts to gain allies there, which carried the following message: “Happiness is multiple pipelines.” This message also summarized American strategic plans for the region.

Oil pundits express the opinion that a state of war between Russia and Georgia could jeopardize US efforts to tap into Central Asian energy resources at a time when record Asian oil demands coupled with diminishing supply jacked up fuel prices to oppressive levels.

“It is hard to see through the fog of this war another pipeline through Georgia,” according to Cliff Kupchan, who worked in the State Department during the tenure of Bill Clinton and who advised Eurasia Group in the realm of political risk-taking. “Moving forward, multinationals and Central Asian and Caspian governments may think twice about building new lines through this corridor. It may even call into question the reliability of moving existing volumes through that corridor.”

Experts fear that renewed Russian enthusiasm in taking control over the region’s geopolitics could play a significant role in fashioning the energy landscape there.

After the demise of the Soviet Union, during the 1990s, concerted American attempts were engineered by Bill Clinton in order to secure control over crude in the Caspian Sea. The Georgian pipeline, otherwise called the Baku-Tbilisi-Ceyhan line (BTC for short) marks a watershed in the positives of American strategic thought for the region which has never relented in trying to estrange the countries of Central Asia from Russia. These countries had earlier been under the Soviet regime before getting divorced from it when the USSR broke up.

Certain observers believe that hostile posturing between Russia and Georgia is not just an extension of their traditional rivalry, but is more an offshoot of Russia’s misgivings that Georgia, which is pro-West ideologically, could turn out to be a long-term competitor in the business of fuel exports.

“Russians treasured the fact they had a monopoly on oil and gas pipelines from Central Asia, as it gave them considerable clout,” observed Marshall I. Goldman, an expert on Russia at Harvard and who recently authored “Petrostate: Putin, Power, and the New Russia.” “By agreeing to having an oil pipeline, Georgia made itself more vulnerable.”

A major concern is about what will happen to Kashagan oil, Kashagan being a major oilfield in the Caspian Sea which oversees reserve oil to the tune of over 10 billion barrels. Situated close to Kazakhstan, Kashagan has been the theater of energetic activities by Western corporates, in recent years, in their endeavors to tap new sources of Caspian oil.

The overall scenario appears grim in the region as Russia flexes its military might against a pro-Western and less armed Georgia which might translate to a choking off of oil flow for the hapless importers. Thus one cannot expect, at least in the short to medium term, and unhindered supply of affordable oil from Central Asia. An ominous and unpleasant geopolitical game of one-upmanship patronized by an unrelenting Russia, laced with the specter of unnecessary bloodshed, is set to dash all hopes of doing business in the region by an oil starved West. Against such a backdrop, it appears that there is hardly much that one can do except continue to buy more expensive Middle Eastern oil.

The Republicans, insisting that gasoline prices must be brought down by increased oil drilling have come down hard on various energy laws. The Majority Leader of the Senate, Harry Reid, has been trying in vain to draw legislators into other issues, but the Republicans are pushing the oil question.

In view of the political climate, Republicans seem to be grabbing at the oil drilling issue as a political lifeline. Editor of the neutral Rothenberg Political Report Nathan Gonzales said in Washington, “it’s one issue where Republicans see a glimmer of hope.’

Voters seem to be more in favour of increased drilling for oil, with everyone feeling the pinch of the high price of gas. The Republicans aren’t ignoring the polls, and are definitely using the issue of oil drilling as an electoral platform.

According to Nevada Senator John Ensign, “Energy is going to be the No. 1 issue in the presidential race and in the Senate races, because it affects everyone”. Senator Ensign is the chairman of the National Republican Senatorial Committee.

Increased drilling for oil has recently become the entrepoint of John McCain, the Republican presidential candidate. He feels that the soaring costs of gasoline are adversely affecting the American citizen. A few days ago, McCain stood against the backdrop of an oil field in California to reiterate his message and stance on a greater extent of oil drilling.

Just yesterday, press conferences demanding increased oil exploration and accusing the Democrats of inflexibility were held by US president George Bush and Mitch McConnell, the Senate Republican Leader from Kentucky. The president said that the United States Congress is the “only thing standing now between the American people and these vast oil resources”.

According to the Democrats, their rivals in politics will suffer when it comes to votes since they are discouraging the seeking of ways to find other energy sources and cut down on oil consumption. Harry Reid said on the Senate floor yesterday, “The Republicans have blocked everything.” The Democrats feel that the drilling plans drawn up by the Republicans would not result in a greater supply of oil till more than a dozen years have passed. Even impartial experts say that the November elections will result in reduced Republican seats in the House as well as the Senate.

Another issue concerning the Republicans is the indictment of Ted Stevens, Senator from Alaska with the longest tenure, and a major advocate of increased drilling. Stevens stands accused of failing to disclose required financial information on Senate financial disclosure forms. This hasn’t altered the Republican stance, though, and a CNN poll held between July 27 and 29 revealed that 69% of surveyed segment were in favour of the Republican plans for more oil drilling, and only 30% were against it.

Oil prices have been very high recently, with a record high of $147.27 on June 11. On July 28, according to the Energy Department, the price of regular unleaded was $3.96, down from $4.11 per gallon on July 14.

More and more Republicans are now supporting offshore drilling – McCain, who was against drilling, has now changed his stance, due, he said, to the detrimental effects of high gas prices and American’s dependence on imported oil resources. North Carolina Senator Elizabeth Dole is another Republican who has begun to support offshore drilling.

Colorado’s American Future Fund is asking for Democrat Mark Udall (who is a rival Senatorial candidate to Bob Schaffer) to act in favour of drilling.
Democrats like Nebraskan Ben Nelson and Virginian Jim Webb are in favour of increased drilling – seventeen voted along with the Republicans to insist that Congress conduct a comprehensive discussion on oil exploration and other energy issues. House Majority Leader Democrat Steny Hoyer from Maryland emphasized the statement, “Democrats are for drilling’ several times at a press conference, referring to the fact that Democrats favour more drilling on existing fields. “There could be an energy fight over almost anything”, Steny said.

This action on the part of the agency comes in response to a significant fall in IOC’s profit margin as a result of ongoing regulatory controls in India. This has meant that the company cannot freely pass on the spiraling cost of oil to consumers. The steepening price of oil, despite alleviating measures undertaken by the Indian authorities, has had a markedly deleterious impact on the profit lines of companies such as IOC.

Moreover, the future years are likely to witness a further deterioration of the company credit profile, not least due to its considerable capex plan in the medium term.

“The sharp increase in global crude prices is leading to mounting under-recoveries for IOC and is expected to substantially increase the company’s need for funding to meet both working capital and capital expenditure requirements,” according to Ivan Palacios, who is the Assistant Vice President and main analyst for Moody. “Declining profitability and increasing borrowings to accommodate the capex plan will lead to deterioration in credit metrics, which will no longer be consistent with the previous rating,” Palacios goes on to add.

Despite steps initiated by the Indian government to address the losses being suffered by refineries owned by the state- like: increasing the monitored domestic fuel rates, slashing import duties on crude oil and reducing excise duties levied on gasoline and diesel, the domestic prices of fuel remain unforgivably below that dictated by the market. Additionally, returns from oil bonds can only partially shore up depleting bottom lines. Moody’s takes care to mention, also, that IOC suffers from an excessive preponderance of short-term debt, which is bizarre for a company looking for investment, more so in the current scenario. Fortunately, this has been somewhat counterbalanced by loyalty of the country’s banking system towards IOC. Further, the Reserve Bank of India (RBI) has pitched in to bail out these types of companies by snapping up oil bonds through its open market operations.

The rating accorded to IOC by Moody’s takes into consideration its underlying rating (that is, BCA) and also the latter’s anticipation of timely governmental support that the oil company is likely to be extended in case of impending financial collapse. But, in the final analysis, it is the fall of IOC’s BCA to 11 (comparably similar a Ba1 for Moody’s) which has precipitated the company’s final credit rating to slide to Baa3. According to Moody’s, IOC is likely to continue to receive governmental support, although it considers the degree of default dependence between the government and IOC (one of the factors in Moody’s JDA Methodology) to be “High” instead of “Medium”. The downgrading of IOC highlights the effect of growing subsidization of oil on governmental fiscal deficit, as also the accentuated strategic, political and social status of IOC in the eyes of the government in a scenario of uncertain oil price.

Moody’s consideration of IOC as a stable investment destination is an affirmation that the rating is not likely to weaken further in the near future, but a revision of such a rating may only be forthcoming in response to a noticeable shift in the rating accorded to the oil company by the Indian government. Taking into account the prevailing atmosphere of uncertainty in India, and climbing prices of crude, there appears to be a very paltry likelihood of the rating going up. However, if sustained subsidization of oil continues resulting in reduced financial hardships for IOC, so that the Cash Flow/Debt ratio is more than 20%-25% and the EBIT/Interest ratio is above 4x-6x on a persistent basis, there can be expected to be some upward movement of the rating.

Opposed to this, if RSF/Debt sinks below 5% and EBIT/Interest slides below 1.5x consistently, there could be a dip in the rating. Furthermore, if IOC’s cash position deteriorates as in case of hardships in getting buyers for its oil bonds, which could be a direct consequence of the RBI discontinuing its mopping up operations and with no alternative governmental action in sight, IOC’s rating could take a hit. Baa3 for IOC is, incidentally, at the same level as the currency bond rating of Indian government. If the latter rating starts going southward, so will be IOC’s rating.

All in all, IOC, which is owned 80.36% by the Indian government, doesn’t paint an all-too-pretty picture for the wary investor. How much investment it’s able to attract will be a matter of the future and its ability to present itself as a viable and profit-making concern that is not dependent on its existence by clinging to the apron strings of an indulgent government.

It would be interesting to follow the relentless northward march of world oil price and its inherent ability to dampen upbeat markets and also restrain the purse for people in the poorer nations.

Since 2002, Benchmark New York crude oil futures have been registering increase at an accelerated rate, recording a 600 percent increase over the years, and have doubled from values that were predicted by experts as not sustainable.

There have been warnings the soaring oil prices would have a debilitating effect on the US, and then the world, economy. These concerns have been largely been proven unfounded since oil prices reached a record of $40 a barrel in 2005. But, unfortunately, things are not that bright now.

World oil price has recorded a 50 percent jump this year which, when viewed against the backdrop of global credit crisis and surging food prices, has provided ample reason to the International Monetary Fund to forecast a global recession with a probability rate of 25 percent (which it views as a growth rate below three percent for the years 2008 and 2009). Not unsurprisingly, the confidence level of consumers in Australia has taken a beating and dipped to an all-time low at this point in time when compared over the last 14 years.

Several reasons have had a contributory effect on the rising price of oil, and just when one of them had been resolved, raising hopes of stabilization in price, one or more of them assumed prominence.

Burgeoning global oil demand crossing all expectations, anxieties of cutbacks in production, fears that the war in the Middle East would hamper supply, a depreciating US dollar and also concerns that an ongoing global credit crisis would send more investors flocking to the energy sector to invest their funds have all been relevant factors that have fuelled the advancement of oil prices. And unfortunately, none of these factors are showing any signs of receding.

Recollections of the destruction perpetrated on the US oil industry by hurricanes such as Rita and Katrina in 2005, and the onset of the Atlantic hurricane season do not help either in the attempt to ward off fears of an oil crisis.

Experts had harbored hopes that once oil price touched the psychological level of $100 a barrel, consumers would see some reason in easing off demand, and one might expect a welcome drop. But the last six months have belied these expectations with oil prices refusing to fall much below $130 a barrel- even if there was a drop from $140 a barrel the previous month.
Interestingly, the developed economies have been affected more by the global credit crisis rather than oil prices, which act as a pointer to the altered nature of their economies as compared to the time when these prices last hit these levels.

The enhanced demand from economies in the Middle East as well as China has impacted in no small measure to the rising woes of those reeling under the impact of oil prices.

Notwithstanding concerns of a global economic downturn, the International Energy Agency (IEA), a watchdog for Organization for Economic Co-operation and Development (OECD) countries, forecasted a higher demand for oil in 2008 in its monthly report for July, which was the first time it has done so since predicting a subdued demand in its December report.

In contrast, however, Organization of the Petroleum Exporting Countries (OPEC) projected a lower demand for oil the same month. The differences in the viewpoints of both these bodies need, however, to be viewed against the backdrop of pressure created by the western countries on OPEC to hike production.

OPEC attributes high oil prices to speculative activities and is reluctant to boost output in order to push down oil prices. This thoroughly negates IEA’s viewpoint that higher prices are a result of increased demand and hence increased production is a necessary remedy.

While the developed nations have been protected against rising oil prices through a deft blend of economic growth, subsidies and fuel-efficiency, it seems the less endowed have to contend with a grim future with no viable solution in sight.

The ban in question is a law enacted in 1981, and although President Bush withdrew an executive order to the same effect, the 1981 law still holds good. Unless the Congress lifts this ban, offshore drilling cannot take place. The Democrats in the Congress are against repealing the offshore drilling ban. Bush feels that as far as revoking the ban is concerned, the “sooner the better”.

According to Bush, the Democrats, who have not taken up the cause of offshore drilling, have the chance to ease the situation as far as American citizens are concerned. The Democrats should, he said, “match the action I have taken, repeal the congressional ban and pass legislation to facilitate responsible offshore exploration.”

The Republicans in the Congress added their voices to Bush’s appeal to revoke the offshore drilling ban. Republican from Ohio John Boehner charged the Democrats in Congress of acting as a barrier to producing “more American-made energy”. Boehner also felt that exploration for oil should be carried out in the Alaskan Arctic National Wildlife Refuge (ANWR) and sand containing oil in the West should be processed. The Democrats have been against AVWR oil exploration as they are concerned about destroying the delicate balance of the Arctic environment.

The Senate Republican Minority Leader Mitch McConnell from Kentucky that current price of gas is too high. McConnell said, “$4-a-gallon gasoline is unacceptable to the American people and unacceptable to the Republicans in Congress, and we want to do something about it. And doing something about it involves both finding more and using less. We need to do both.”

In opposition, Nancy Pelosi, House Speaker form California said that offshore drilling expansion would not do much to bring gasoline prices down. Pelosi said a better way to lower gas prices at once would be to release oil from the Strategic Petroleum Reserve, which holds 700 million barrels of oil. President Bush however, feels that this would endanger national security. Pelosi’s reply to this is: “The president said … that drilling offshore would not have an impact on the price at the pump, and I’m glad he’s finally admitted that to the American people. Our message back to the president is, ‘It’s the economy, Mr. President.’”

Representatives of coastal states such as California and Florida have also objected to the proposed lifting of the ban on offshore drilling.

On Monday afternoon, the governor of California, Arnold Schwarzenegger, said, in disagreement with Bush’s efforts to increase offshore drilling, “I know people are frustrated with the soaring price of gas, and I welcome the national debate on solutions to lower our energy costs, but in California, we know offshore drilling is not the answer. We will continue to foster a market for alternative energies, because choice is the only way we will ultimately bring down fuel costs.”

Bush, on the other hand, felt that removing the prohibition on offshore drilling would give the message that Americans are ready to exploit their own oil reserves and would “send a signal that we’re willing to explore for … oil here at home.”

The President said, “I fully understand this is … a transition period away from hydrocarbons. But we ought to be wise about how we … use our own resources.”

The primary basis for resistance to offshore drilling is the damage to reefs that such drilling can cause, but President Bush said that it is possible to drill for oil without harming underwater reefs.

Bush said that as a fisherman who likes fishing, he is concerned about the reefs and is aware how vital they are for fisheries. However, he also added that modern technology makes it possible to access oil under a reef by drilling vertically at some distance from it and then drilling horizontally to the exact location of the oil.