Let Us Worry and Not Worry Too #Crude #Economy

The Crude prices are a definite concern for India when they rise but when the rupee falls crude should not be blamed. The parity of currencies will adjust on a continuous  basis and there is nothing that is special about it. However , when the crude prices jump in a manner outpacing all other commodities then we as a nation become disadvantaged.

The past ten-twelve years have been special years for India and also or the world at large. It was in this period that China and India progressed at faster pace than the rest in the world . These nations also happen to be oil importing nations. Naturally the pressure on oil prices was going to be there but it could be taken well in stride by these two nations because of there greater participation in world’s economic exchanges in a favorable way.

The western nations have been having problems with growth and did not contribute to demand surge in a significant way and that may have still kept the oil prices in check but to a small extent only . The crude sells for $110/bbl now as against about $25/bbl in 2001-02.  This is no small jump but seen against the price of gold and silver, it is not much of a difference.

Since just before the 2008 crisis the price of crude is relatively cheap against gold because it had crossed $140/bbl then and  dropped to $40/bbl later.  Forgetting this extreme behavior and relating it to gold prices , post 2008 gold has gone up more in value.  Post 2008 period is a new chapter in economic history of the world because every other nation resorted to printing currency/ expanding money supply and keeping interest rates under leash. This should have reflected on oil prices as also on gold prices and other assets too.

What I have tried to make out is that there is no situation calling for panic in respect of oil scene. However , we in India have become too upset by what is happening here. I may tell you this is something that has been invited by us or to be exact by our govt.

Let us look at some fact and figures. We have reliance on fossil fuels to the extent of 3/4th of energy consumption. Of this 3/4th , 40% is from coal and 30% from oil and gas.  80% of Oil and gas requirement is met through imports and it would rise to 90% over the next year or two. We have had to foot the import bill of $79.55 billion in 09-10 and $106 billion in10-11 which is equivalent to 1/3rd of total import bill. We import 70% oil from middle east where we may have scope to export and have remittances from Indians there.

We imported just 200 million barrels of oil in 90-91 , 600 million barrels in 2001-02 and now we import more than 1200 million barrels. This speaks of our ability to arrange required forex and still keep rupee value intact which has only eroded badly recently. No doubt we have been supported by IT sector in increasing dollar availability. There have been investment related inflow ( which i despise as it sells a part of India to outsiders). Then there has been greater manufacturing efficiency allowing us to export more. If only sound policies with a better legal framework had been put in place , our ability to compete would have been better.

We cry too much for oil price contributing towards inflation while oil is just responsible for 14% of the headline inflation. Since 2008 international crude oil prices have not gone up much but inflation has been far higher. So blaming crude for prices is wrong , it is not economizing on fuel consumption that is bad. This has happened due to keeping lop-sided subsidies on different products and not letting any direct relationship prevail in domestic prices and international prices. The subsidy element could have been kept as a proportion of the cost price at a reasonable level for petro products used by poorer sections of society and for agriculture but not in a irrationally fixed manner. The govt has all the liberty to move ahead in this direction but they have no real concern and this leads me to believe that some people draw wrongful advantage in the whole scheme of things in oil sector.

No doubt that our  average per-capita oil consumption is 1/5th of world average. This is our strength and we should not lose this strength by solely making our social and material progress dependent on oil. I do agree that oil is a necessary input for faster growth , but here we should consciously decide to base our growth based on model where oil consumption growth rate is lower than overall rate of growth. This will make future oil shocks more manageable as the oil shocks will be routinely there. Oil prices do not move in a natural way , the big speculators and cartels have their hand in it. The oil interests, exploration, marketing, movement, pricing and availability are all without transparency.

In India petrol price has gone up from Rs 33/ltr in 2002 to Rs 78/ltr now and diesel price has gone up from Rs 23/ltr in 2002 to Rs 45/ltr now. So diesel is now cheaper (compared to petrol) by 42% against 32% since 2002 .  Over last ten years every thing has become this much costlier.  But oil sales have filled the govt coffers by a greater margin. it is another matter that they spend it more foolishly and without benefiting the masses.

We do not have to worry too much because the world consumption is going to grow by just 1% between now and 2035 according to some studies. The consumption will rise from 90 billion barrel/day to 110 billion barrel/day. Also while we import just $118 billion worth of oil as against $426 billion by USA, $500 billion by Eurozone, $250 billion by China and $190 billion by Japan. Its not that oil spike will hurt us only. Further our gold imports will always allow us to make adjustment in times of real crisis.

Another saving grace is that we distill all the crude ourselves for our requirement and have further capacity to export. This saves a lot in terms of costs. In the end I would say that as and when the govt will see the light of the day and opposition would be co-operative , oil related issues will be thing of past.

HariOm,

krsnaKhandelwal

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