Why commodity inflation won't go away in a hurry

… We are staring at Hubberts Peak (declining oil prices) here onwards. The Society of Petroleum Engineers (www.spe.org) endorses that view. So does the Association for study of peak oil (www.peakoil.net) and these are men and women who brave the elements to hunt for oil. Many myths have been floated by investment analysts — primary one being technology making it cheaper to drill for black gold. Schlumberger (global leader in drilling equipment manufacturer) doesn’t seem to endorse that view. Drilling equipment and other costs continue to zoom.

New discoveries are elusive and well pressures are falling. Lukoil, the erstwhile Soviet Union’s heavyweight producer (Russia has one of the highest proven reserves in the world), has officially confirmed a 15% decline in oil well pressure. Mexican wells have reported even steeper fall in pressure — up to 40%. Alternate sources of oil like oil sands of Alberta and Sasol have been touted as alternatives.

But they are sadly economically unviable. Emerging economies are ill-equipped to shift to alternate fuels without sinking in international debt to finance the capex needs. Expect natural gas and crude to appreciate further. Throw in the falling USD effect and you know what to expect here too.

DNA India