'Govts should not make policies based on oil price drop'

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Governments should not get too optimistic due to the fall in global oil prices, as the situation might reverse in a matter of weeks, an advisor to the Crown Prince of Bahrain said on Monday.

Crude oil prices have lost around $30 a barrel in three months. This has raised hopes of an uptick in global economic growth. But Mohammed bin Essa Al-Khalifa, advisor for political and economic affairs to the Court of His Royal Highness, the Crown Prince of Bahrain, advises caution.

"My advice to all world economies is not to get too excited by the drop in oil prices and wait and watch for a few more months before announcing any major policy initiative based on the fall, as there is a strong possibility of a revival in demand," he told Business Standard.

The drop in oil prices was mainly due to a supply glut and declining demand.

Al-Khalifa, who was in the capital to attend the India Global Forum, said there were several chances of a sudden uptick in oil demand. Demand might rise because of a rebound of the US economy, which could pull up Europe as well; there could be a revival of demand in China, too. "All these are likely to happen. Hence, I feel that one should not get too excited with the drop in oil prices," he said.

Cooling oil prices had prompted many economists to believe that the days of over $100 a barrel of crude oil was over. "Though, I feel that prices might even drop below $80 a barrel, there won't be a slump as many fundamentals have not altered," Al-Khalifa said.

The world economy is projected to add around 0.5 percentage point to its gross domestic product in 2014-15 because of the slump in oil prices. The Indian crude oil basket was $80.78 a barrel at the last close. Taking benefit of the low prices, the Indian government had last month decontrolled diesel prices. It is now hoping there would be a major decline in petroleum subsidy.

"Oil prices won't stay where they are now and sooner than later there could be an uptick, as the fundamental rule says that what goes down will come up," said Memduh Karakullukcu, vice-chairman and president of Global Relations Forum, a Turkey-based independent and not-for-profit organisation.

He said in the long term there is very little chance of oil prices staying weak as low crude oil rates dry up investments in this sector, which leads to supply shortages, ultimately leading to a spike in prices.