Dr. P Pullarao
Goldman Sachs is one of the most powerful investment banks in the world. Their views are noted and respectfully considered. Even In the USA, Goldman Sachs is treated with great deference due to the diligent work it does in constantly monitoring economies world-wide. Many Goldman Sachs executives are appointed to high offices in the US Treasury department. In essence, they became officials in the U.S. finance ministry. Therefore, whenever a study or opinion is released by Goldman Sachs, it is noted and absorbed immediately.
Goldman Sachs had earlier predicted that oil will sell for US $ 200 a barrel by 2014. That did not happen ,but oil went up to US $ 150 a barrel. In the last month, economists have been re-working their calculations on what would happen if indeed does come down to US $ 20 a barrel.
The OPEC members have been successful in pushing out high-cost oil producers, particularly in the shale oil sector. In the short term, this meant that oil prices will go up as there will be less supply. But as prices go up, once again the high cost producers will be back.
The fact is that there is over -supply of oil. The expected demand from China and other high-growth economies just did not pick up.
Goldman Sachs’s calculates that countries like Saudi Arabia just cannot turn off the spigots. This simply means that there will be over supply. The fact that Iran has now entered the international market free of any impediments is another major factor. Other oil producers like the Kurdish areas of Iraq and the ISIS controlled terrain in Syria -Iraq have access to low cost oil There is no need for any oil exploration in Iraq and ISIS-controlled terrain. They need buyers and they sell oil a any price obtainable. In fact, they are increasing their production.
The existing low oil prices had already reduced the oil sector employment in United Kingdom from 450,000 workers to 375,000 workers. If prices fall lower, then this number will come down rapidly, causing a micro crisis. The shale oil boom has ended in the USA. But that was to be expected. But this temporary closure of shale-oil production facilities only means that when oil prices rise, these facilities will be activated. The US has become self-sufficient in oil for the first time since 50 years.
But lower oil prices also help the economically poorer people. Inflation automatically comes under control. Travel becomes cheaper. The world got used to higher oil prices, though with great pain. It may take some time to get used to lower oil prices. But right now, oil importing countries are not complaining.
In India, lower oil prices have boosted the aviation sector. Many other sectors which are dependent on oil have expanded their economic footprint. There seems to be great anxiety that Indian exports are falling. The latest exports figures released by the Ministry of Commerce, Govt. of India state that exports have fallen by 25% in the month of September, 2015 when compared to exports in September, 2014. This seems to have caused much hand-wringing and helplessness in the Commerce Ministry. But the same media handout says that imports have fallen more than exports when compared to figures for the same period.
No doubt, falling exports mean less economic activity. But the silver lining is that imports have come down, thanks to lower oil and commodity prices. To my mind, the situation is not too worrisome. There will be a period of adjustment the cooling in the Chinese economy and the troubles in Europe.
The Commerce Ministry does little to enhance export prospects. The Commerce and Industry Ministry is charged with the responsibility of improving business climate. The “Ease of doing Business” is the responsibility of the Commerce Ministry. In the last 18 months, there has been little actual improve on this issue, except hundreds of press conferences.
In the short term, falling commodity prices internationally is good for India because we are a major commodity importer. India is investing urge s in infrastructure. Surely, at such a time, lower costs of material and commodities are good and will help obtain cheap infrastructure.
Gold imports which were a major cause of worry for the government automatically shrank. In the period April-September, 2014, when our exports were at a record high, the trade gap was nearly $ 73 billion dollars. Now in the period April-September, 2015, the trade gap is $ 68 billion dollars. Defiantly, though we have lower exports, the trade gap is down. This means that the composition of our exports may not be as good as it looks on paper. Maybe we import all the components and then assemble them and export. There is something definitely anomalous here.
Government should focus on the ” Ease of doing Business ” index. This is the best time for the government to change the way we do things here.
But Oil at US $ 20 a barrel. ? That happen in 2002. It might be the crash of the economies of oil exporters. Usually, the world will adjust to lower oil prices.
The gains of lower oil prices will benefit the poorer sections all over the world. Let us wait for it.
The Ministry of Commerce is wrong to take a shallow look on only the export figures and not the overall impact on India. Lower oil prices are great for India in the long and short run.
Dr P Pulla Rao is a Socio-political and Economic analyst