Friday, January 09, 2015

Falling Crude Oil Prices - A Puzzle or A Design!

This blog post is a translation of an article published in the highest circulated Assamese Daily - Asomiya Pratidin, authored by the highly revered Mr. Ananta Kalita, Former Director at Central Board, SBI. Please click on the link to read the Assamese version.

The prices of Petrol and Diesel have come down by over Rs. 10/- per litre. A lot of us give its credit to the Modi Government. It is obvious because we do not get the time to go deeper into the economics and politics of crude oil prices.

India imports over 80% of its crude oil requirement. By the end of 2008, the price of crude oil had increased to $147 per barrel. However, the price of crude oil in the international market has started falling continually from the month of November, 2013. By october last year, the price of crude oil in the international market had fallen to $100 per barrel, and by 31st December 2014, the price of crude oil dropped drastically by almost half, to a mere $55 per barrel. Today (7th January 2015), the price stands at $47 per barrel. In relation to the international prices of crude oil, the retail price of petrol and diesel should have dropped by 60% and should have been retailing at Rs. 30 and Rs. 25 respectively. But the oil distribution companies have dropped the retail prices of Petrol and Diesel by around Rs. 10 only, keeping huge profit potential alive for themselves. In the meanwhile, the central government has increased the excise duties in three phases - 12th November 2014, 2nd December 2014 and 1st January 2015, by Rs. 6.95 and Rs. 5.96 per litre of Petrol and Diesel respectively.

The international prices of crude oil do not rise or fall by the normal standards of economics. The production, marketing and distribution of crude oil is controlled by the Capitalist countries and the big multinational companies. It depends on the neo-liberal economic benefits of the stock markets and the political interests of the capitalist economies. The current crude oil crisis seems like the combined handiwork of higher oil production, better production technology and a relative fall in demand. It is true that the production of oil by non-OPEC (Organization of the Petroleum Exporting Countries) countries have increased significantly, especially from the unconventional petroleum deposit such as light sand, shallow oil sand and tar sand by the use of advanced oil extraction and refining technologies. Production by OPEC countries have also increased in the present times. After 1991, the present day Russia produces 10.58 million barrels daily. From the demand side, advances in science and technology have increased the fuel consumption efficiency of automobile and other engines, thereby creating a negative demand momentum. Other non-oil based energy options like solar energy, wind energy, Sea wave energy, ethanol, methanol etc are also being harnessed effectively. In such a scenario, even if the international prices of crude oil is going down, the oil producing countries and companies are scared to reduce their production and instead compete heavily in the international markets in the fear of losing market share.

Having said that, there is a critical need to analyze whether the current fall in the international prices of crude oil is due to the rise in production, advances in technologies, fall in demand, or is a conspiracy by American capitalism to achieve something by drastically and unnaturally reducing the international price of crude oil. One of the key American strategies responsible for the fall and breakdown of USSR in 1991 was to drastically reduce the price of crude oil. One of the key contributors to the national revenue of USSR was the revenue earned by exporting crude oil. In order to reduce the international prices, US controlled Saudi Arabia had increased the daily production of crude from 20 lakh barrels to 1 crore barrels, thereby flooding the international market with excess supply of crude oil. The price of crude oil had fallen from $32 per barrel to $10 per barrel! The storage of crude oil is an expensive proposition, and therefore USSR was compelled to reduce the price of crude oil to $6 per barrel to remain competitive in the international market. As a result, the national revenue of USSR was severely strained and there was no option but to cut a lot of budgeted expenditures allocated to various socio-economic security related public initiatives. This created an angst among the general public against the government and the administration, which laid the foundation of the break up of the Soviet Union.

In the eighties, USSR was the target of the USA. Today, the targeted countries are Russia, Iran and Venezuala. Russia is a primary adversary of the US and the NATO countries. Iran is continuing with its nuclear research and development of nuclear capabilities. Moreover, Russia and Iran is coming in the way of controlling and de-militarizing Syria. Venezuala is one of the remaining Latin American countries governed by leftist ideologies. The economies of all these three countries are dependent on the export of crude oil. This kind of continual drastic fall in the price of crude oil will severely affect the national earning potential of these three countries, and their economies will weaken for American to exercise greater power and control.

On the other side, the fall in crude oil prices is also affecting the economy of India. On 6th of January 2015, the Indian stock market - Sensex fell by 855 points in a single day. It was the biggest fall in the last 65 months. On 7th January, the fall continued by 78 points. Practically the world economy is in doldrums. The European economy including Germany is going through a bad worry-some phase. The spending potential of the general population is on a decline. In the name of controlling fiscal deficit, the governments are rolling down public expenditures towards social security related schemes. Public angst is rising at an alarming level. The value of their currency - Euro is declining. Greece is at its worst economic crisis and is expressing desire to get out of the European Union. The current progressive government may lose the coming general elections. The effect of the present unstable world economy with the falling crude oil prices, devaluation of the Euro, worsening Greece economy and the overall negative economic environment in Europe is being felt by the foreign institutional investors (FIIs) with large exposure in the Indian stock markets. As a result, they are taking away millions of dollars out of the Indian stock markets. Indian companies listed in the stock markets have lost over 3 trillion Indian rupees. At the same time, the value of Indian rupee has fallen to Rs. 63.17 per US Dollar.

The fall in the Indian share markets is nothing extra-ordinary. It is controlled by speculative instincts and intent of the profit seeking FIIs. The fall in the Indian share markets won't affect the Indian economy or the lives of the common people. The rise and fall of the stock markets are expected. However, the fall in the value of the Indian rupee will have a negative impact on the Indian economy.

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