The international oil prices recently fell below $70 a barrel on fear of financial instability resulting from the US sub-prime mortgage woes. The prices rebounded when the US Federal Reserve took corrective action and the capital markets responded to it.

But the oil giants continue to watch the financial markets for signs of any further turmoil, as US sub-prime loans crisis too was not fully resolved.

The presidential candidates in the United States have expressed the view that the sub-prime mortgage problems will not be tackled so easily. They believe that the problem has the potential to plague not only the US housing sector but the entire US economy, unless remedial action is taken on all fronts.

Somehow, the highest oil price rise in a generation has been witnessed over the past four years or so, hovering around $70 a barrel or more in the recent months.

The Centre of Global Energy Studies (CGES) has advised Opec to reconsider easing its tight grip on oil production because it is negatively impacting on oil demand itself, as evident from the falling oil inventories, the world over.

Opec began making formal output cuts in October 2006 and had continued to do so, although the oil prices had risen to a very high level. The CGES fears that the sustained higher oil prices combined with the problem in the US sub-prime mortgage market could adversely affect the global economy.

A sharp downturn in US economic growth could, in turn, slow demand for Chinese exports which are fuelled by the US consumption demand.

The CGES has warned the Opec that if oil prices start falling, the Opec should avoid the temptation to cut output in support of prices, since that would undermine the demand for oil further. According to the CGES, the oil prices had remained too high for too long.

The global economy now needs a period of moderate oil prices in order to recover. The CGES has advised the OPEC member countries to play their part in providing such a respite to the oil-importing countries, by increasing its production and bringing down oil prices to a moderate level.

What is more dangerous is that the higher oil prices are accompanied by an uncertain oil security. According to the Wall Street Journal, energy insecurity is one of the chief political, economic and military challenges facing the world today. The worry from Washington to Beijing is concerning the growing oil insecurity.

There is no doubt that one of the main culprits behind the oil insecurity is the rising demand. The International Energy Agency (IEA), the industrialised world’s energy watchdog expects oil demand to grow at a rapid pace of three per cent per annum in China, India and most of developing Asia, while it expects annual growth of two per cent or more for the Middle East and Africa. Thus, according to the IEA estimates, by 2030 the demand from developing countries and transition economies – primarily former communist Eastern Europe – may outstrip the demand from the industrialised nations.

On the other hand, there is turmoil in the oil-exporting countries. Nationalists in Nigeria are attacking oil facilities almost on a daily basis. Russia is reportedly considering re-nationalising its oil sector. Similarly, the policies of Venezuela under its President Hugo Chavez are reported to have adversely affected oil-field investment and according to IEA, oil production in Venezuela dropped to 2.6 million barrels a day in 2006.

Similarly, oil development projects in Canada, which is one of the main oil suppliers to the US, are becoming more and more difficult. Canadian heavy crude is more expensive to exploit and, second, environmental concerns pose a major threat to the development of this source. This is because the project is likely to cause damage to the landscape marked with beautiful forests, contaminate man-made lakes and considerably add to the greenhouse gases.

Another important source of oil supply to the US namely Mexico is also facing problems. According to latest reports, production at the country’s biggest oil-field, Cantrell, is cratering. The oil-field contributes about 60 per cent of Mexico’s total oil production and its vulnerability adds to the element of oil insecurity.

The geopolitical concerns surrounding world’s top three oil reserve holders -- Saudi Arabia, Iraq and Iran-- are a major source of energy insecurity. Iraq is presently producing about two million barrels of oil a day under the umbrella of a American Navy armada. However, even this level of oil production is threatened by an unending civil war. There are also uncertainties about supplies from Saudi Arabia and Iran.

Against the growing global demand, Middle East itself is consuming a lot of oil and it is reported to be on track to use an additional 1.8 million barrels of oil per day by 2011. In that event, the region will be left with much less oil to ship overseas.

While the global demand for oil is growing at a rapid rate, the oil supply is constrained due to geo-political situation, environmental concerns and political factors. The demand-supply gap has resulted in the higher oil prices as well as energy insecurity. The remedy lies in ending the geo-political tensions and boosting the world oil output.