Chittaranjan de Silva
Sri Lanka’s oil reserves, which could hold for a period of 3-4 months will be used to counter the rising cost of crude oil, which is selling at around U.S.$ 30 a barrel, Central Bank Governor, A. S. Jayawardena said.

He said that crude oil prices are expected to decline to around U.S.$ 26 per barrel since countries such as the U.S.A. are releasing oil from their reserves.

Mr.Jayawardena addressing a press conference on Thursday at the Central Bank, said that countries maintain reserves to use them in cases of emergency, to prevent an immediate revision in fuel prices.

He expressed the hope that the reserves would last until the world crude oil prices stabilise. He maintained that there is a significant growth in exports, which augurs well for the economy.

But economists pointed out that irrespective of the government that comes to power, petroleum prices in Sri Lanka are expected to rise following the steep increase in the world crude oil prices.

A joint President of the Sri Lanka Economic Association (SLEA), a former Governor of the Central Bank, Dr. H. N. S. Karunatilake told "The Island" that intervention by America, which released 30 million barrels of crude oil from their strategic reserves would help in lowering the prices of crude oil.

In Sri Lanka, the diesel price and was raised after June, today stands at Rs.19.50 per litre, which is an increase of Rs. 3.30 compared to previous price.

Dr.Karunatilake, however, said that Sri Lanka would not feel the effects much as crude oil prices are expected to stabilise in the range between U.S. $ 25-30. The country’s exports have registered a growth, he said. But it all depends on how severe this winter would be in the Northern hemispher. If the winter is severe, the demand for oil would increase causing the prices to rise further.

Foreign media reported that a heavy demand for oil is expected in the winter season amidst fears of a shortage of supplies.

Meanwhile, oil prices on Thursday was slightly higher and stood at US $ 30, the Reuters news agency said. It reported earlier that European leaders are debating whether to follow the U.S. example and unlock strategic oil reserves to beat down the soaring fuel costs.

According to statistics crude oil prices have fluctuated widely with time. A barrel had fetched U.S.$ 17.19 in July 1999, while in July 2000 it had increased to $ 29.51. The oil price had hit an all time low in $ 9.20 in 1998. Much earlier, in 1970 a barrel of crude oil was sold at $ 11.29, before the prices increased twice after 1973. Crude oil prices had recorded values as high as $ 50 in 1980.

According to Reuters, the Organisation of Petroleum Exporting Countries (OPEC) the producers cartel had warned that it might have to take action to shore up prices. However, OPEC had promised to increase crude oil prices from October 1 to meet the increased demand.

But oil cartel members, who have warned that oil production capacity is reaching a limit, also said that oil prices could rise as high as US $ 40 per barrel.

However, Saudi Arabia, which is by far the world’s largest oil exporter is unhappy over the high price and wants the price of oil to be in the range of US $ 25 per barrel.

The United States is by far the largest single consumer soaking up a quarter of the total world petroleum production. Before countries such as the U.S.A. took measures to control the price of oil, crude oil prices reached U.S.$ 36 a barrel, sending shock waves among consumers in many countries, which also sparked off protests in Britain and other Western countries.

Former President of the Sri Lanka Economic Association, Dr.Gamani Corea said the world market price of oil has increased to the levels that prevailed in the early seventies, and is bound to affect the developed countries as well as the developing countries.

"Because the Sri Lankan rupee has depreciated the price we have to pay for oil today in rupee terms is much higher than in the past," he said.

He indicated that the petroleum prices in Sri Lanka would rise following the trend in other parts of the world.

Responding to question raised by this reporter, as to why Sri Lanka is depreciating its currency almost at a rate of 10% per annum with respect to the U.S. dollar, Dr. Karunatilake said, "I just don’t understand."

He further said that depreciation of the rupee would not cause the growth in exports, as perceived by many. For instance, although the Indian rupee is stronger than the Sri Lankan rupee, Indians have done comparatively better in exports, he explained.

Dr.Karunatilake explaining how the government benefits through currency devaluation, said that when the rupee is devalued, the prices of goods go up in value. Then the government could raise more revenue through G.S.T. and other taxes.

Dr.Corea said the exchange rate of the rupee depends on several factors. Due to the rise in the price of crude oil, the trade deficit would widen since cost of oil imports would be higher.

The balance of payments would also increase affecting the country’s reserves. These factors as a whole would bring pressure on the exchange rate, he explained.

Economists added that the exchange rates could also be affected since pressure would be brought on the country’s reserves.

According to economists, the increase in crude oil prices in 1973 had affected the country’s economy then. According to them, the chances that the economy could be hit through a rise in oil price is more significant today. Sri Lanka is far more dependent on fuel today, especially in power generation, they said.

Dr.Karunatilake was of the view that recent rains in the hydro catchment areas would enable electricity generation at its capacity for some time, which would avert power crises or increase in electricity rates.

However, during recent times, when the water levels were low, more than 50% of the country’s electricity requirement was generated thorough thermal power. With the rise in oil prices, electricity rates are bound to increase, escalating the cost production of goods, economists said.

According to Dr.Corea, though OPEC is regulating the oil prices, the price of other commodities has declined in the world market. The need has risen for other countries, which are producing commodities other than oil, to unite together and regulate prices of these products, he pointed out.

Earlier, efforts were made to regulate world commodity prices through the United Nations Conference for Trade And Development (UNCTAD), he added