Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 150
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Deprecated (16384): The ArrayAccess methods will be removed in 4.0.0.Use getParam(), getData() and getQuery() instead. - /home/brlfuser/public_html/src/Controller/ArtileDetailController.php, line: 151
 You can disable deprecation warnings by setting `Error.errorLevel` to `E_ALL & ~E_USER_DEPRECATED` in your config/app.php. [CORE/src/Core/functions.php, line 311]
Warning (512): Unable to emit headers. Headers sent in file=/home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php line=853 [CORE/src/Http/ResponseEmitter.php, line 48]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 148]
Warning (2): Cannot modify header information - headers already sent by (output started at /home/brlfuser/public_html/vendor/cakephp/cakephp/src/Error/Debugger.php:853) [CORE/src/Http/ResponseEmitter.php, line 181]
LATEST NEWS UPDATES | Decoding the oil price fall -Raghuvir Srinivasan

Decoding the oil price fall -Raghuvir Srinivasan

Share this article Share this article
published Published on Jan 12, 2015   modified Modified on Jan 12, 2015
-The Hindu


Year 2015 will be crucial as shale oil firms begin to feel the pinch of low prices

Are falling oil prices good or bad for the global economy? And how do they work for India? Till recently these questions were no-brainers. Cheaper oil is obviously good for the global economy; for an energy-intensive economy such as India's, which also depends on imported oil for meeting four-fifths of its needs, a fall in oil price is like manna from heaven.

Yet, the biggest fall in the stock market in five-and-a-half years last week was triggered by crude oil piercing the $50 a barrel mark on its unrelenting downward journey. Isn't that ironic?

The benchmark S&P BSE Sensex fell by 3 per cent or 855 points in just a single trading session on January 6. To be sure there were other causes too such as fears over Greece exiting the euro zone and slowdown in China. But yet, the fact is that global stock markets have been nervous in the last one month over sliding oil prices and investors, in their desperation to find reasons for the slide, have somehow arrived at the conclusion that this is indicative a global economic slowdown or worse, even recession.

Nothing can be farther from the truth though. Yes, there are issues with the Chinese economy which is seeing a slowdown in manufacturing growth (mind you, this is not the same as a recession) and the euro zone's troubles continue with Greece headed for snap polls amidst fear of a run on its banks. But the positive impact of falling oil prices outweighs these worries, at least at this point in time.

A recent IMF study says that every $10 fall in oil price adds 0.2 percentage points to global GDP growth. And that should mean a boost of a over 1.2 percentage points to global GDP growth given that oil has dropped from around $115 a barrel six months ago to less than $50 a barrel now. So where is the basis for fear of a global slowdown or a recession?

Anatomy of the fall

It is simplistic to assume that oil prices are sliding only because of falling demand. The reality is that the plunge is due to a complex interplay of several factors, including, of course, lower demand.

The inability, or unwillingness rather, of the Organisation of Petroleum Exporting Countries (OPEC), which accounts for about 40 per cent of global oil output, to cut production to match the demand is a major factor.

OPEC members are caught in a difficult spot as cutting down production will mean loss of revenue. They are also conscious about holding on to their market shares; cutting output will mean a loss of market share, especially if the U.S. shale gas producers continue to pump away. Yet, every barrel that they are unable to cut is adding to market surplus and depressing the price.

Saudi Arabia, which dominates the cartel with the highest share, appears determined to stay in a race to the bottom along with U.S. shale oil producers.

The kingdom is gambling that shale oil will become economically unviable to produce - if it already has not - as prices head below the $50 a barrel mark. First signs of that gamble paying off are just beginning to appear on the horizon. Drilling activity for shale oil is beginning to slow down as producers begin to feel the pinch of unremunerative prices. America's oil output may now be at a three-decade-high but 2015 will be a crucial year as shale oil producers begin to cut down on output.

Demand-supply equations

If basic demand-supply equations are one factor for sliding oil prices, the other is financial market equations. The oil market was funded in a major way in the last few years by cheap dollars flowing out of the Federal Reserve's quantitative easing programme. With interest rates at near zero, surplus funds flowed into the commodity markets, notably crude oil, driving their prices upwards.

With the Fed winding up its stimulus programme and an interest rate hike in the U.S. possibly just round the corner, funds are now flowing out of commodities, driving their prices down. It is not a coincidence that oil prices started falling at around the same time that the Fed first indicated the possibility of a rate hike in the near term.

Oil prices are likely to stay soft for at least the rest of this year though periodic minor spikes cannot be ruled out. This is, as said at the beginning of this piece, good news for the world economy and also India's. Cheaper fuel prices will put more money in the hands of consumers which will, in turn, be either invested or spent elsewhere.

According to Moody's chief economist, Mark Zandi, quoted in a recent Bloomberg report, if oil stayed at $60 a barrel, American consumers would save a whopping $150 billion on their fuel bills which, according to him, will be spent elsewhere driving economic growth. This would hold true for other countries as well, including India.

Of course, we are assuming here that governments across the world pass on the benefit to consumers and not appropriate it as taxes. So far as India goes, a lot depends on how well the government exploits the low oil price scenario. For one, it should use the chance to clean up its subsidy act once and for all, mainly in cooking gas and fertilizers. It should push for transparency in pricing of fuel by the oil companies, something that is now absent.

The government should also ensure market prices for the oil producing PSUs - ONGC and OIL - so that they can invest in exploration and production.

It should resist the temptation to raise taxes - excise duty has gone up thrice in the last two months depriving consumers of the benefit of lower prices. To the contrary, the government should pass on the benefit to consumers who can then either spend the surplus elsewhere or save.

Costs across the economy would also drop acting as a stimulus by itself if the government cuts fuel prices. The benefits from a larger macro economic perspective in the long-term would be bigger than the resources raised from fresh taxes in the short-term. We missed the opportunity to do all this the last time when oil prices were at similar levels. We cannot afford to miss it again.

raghuvir.s @thehindu.co.in


The Hindu, 11 January, 2015, http://www.thehindu.com/business/Economy/decoding-the-oil-price-fall/article6775625.ece?homepage=true


Related Articles

 

Write Comments

Your email address will not be published. Required fields are marked *

*

Video Archives

Archives

share on Facebook
Twitter
RSS
Feedback
Read Later

Contact Form

Please enter security code
      Close