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India must use the oil windfall

Dr. P Pullarao

At the heights of his powers, Napoleon of France  was asked  what kind of Generals he wanted for his armies ? Napoleon replied “LuckyGenerals “. That said it all..Luck is the greatest  asset of anyone. Narendra Modi seems to be very lucky  since July ,2014, when Modi became Prime Minister, oil prices declined  from 120 dollars a  barrel to the present price of 30 dollars a barrel. Thanks to such a  low price of oil, India which depends greatly on imported  oil, experienced  great economic relief . It was an economic bonanza for India. Straight away, India Government gained nearly 3 lakh crores  relief as it saved an enormous subsidy for fertilizers, kerosene, LPG gas, petrol and diesel. Not only that, the government was able to tackle serious inflation and brought down the wholesale price index.

 

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Of course, this is an  ideal situation and cannot be expected to last  forever. India must safeguard her future economic interests by hedging all bets on oil. There are stirrings in the OPEC and other oil exporting countries. They feel foolish since they are becoming poor by producing oil. Earlier, they became rich by producing oil. Yet, each oil producing country is mortally afraid that they might lose markets if they stop producing oil. Yet, there are now tendencies that oil-exporting countries might unite and  bring up the price  of oil

 

 

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Some  moves made by Russia and Saudi Arabia :The price of oil fell below 30 US dollars a barrel recently. This caused consternation in all stock markets.The Saudis gambled that if they sold oil below what shale oil producers can offer, then the market will stabilize. It turned out that even without competing shale oil capacities, oil prices were falling. Less shale oil is entering the market now. Saudi Arabia was reduced to such a stage that it offered 10% of ARAMCO shares for sale. Arabia dipped into its giant Sovereign Wealth Fund  to meet its daily expenditure and budget needs. But Saudi Arabia cannot do it endlessly.

 

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Russia also faces a terrible situation since its entire economy is based in oil and commodity exports. The brave faces put up by the Russian government cover up nervous anxieties and dread of what will happen if oil prices do not rise. There is nothing Russia can do with the market.Therefore the meeting of the Russian Govt with Saudi government and the agreement to freeze oil prices at “January levels” is not at all a surprise. Two of the world’s biggest oil giants have come together to help each other  survive. The Russians and the Saudis have made it seem that the meeting is a very normal usual meeting.They did not want the world to think that they are at a very desperate stage, which they are. The meeting of the Russians and the Saudis took place after a lot of ground work was done.

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The world expected that when Iran joins the world oil market, prices would further slide. That happened a little bit. But when Iran also agreed to consider an “Oil Freeze” , the oil price rose by 10%. Iran wants to first raise its oil production to the pre-Ban levels and then sit down with OPEC and then discuss a freeze. That is a logical aspiration by Iranian realizes that if it agrees to freezes oil production now, then it would only help Saudis and the Russians.

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The oil economy in the world has changed in the last 10 years.Alternate sources of energy have emerged. New oil fields in distant parts of the world has reduced the importance of Middle East oil. The shale oil production in USA has totally tilted the oil economy from a Middle East Oil dominance to a more stable situation.

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While  it is difficult to predict the emerging trends ,it might take another year at least for oil prices  to rise. But Iran will be worth watching. Will it patch up with Saudis and go along with OPEC? Or will it enjoy seeing  Saudi Arabia face a grim crisis if oil prices do not rise?
In any event, the sooner the world moves away from oil and coal, the better for our climate. Iran know that if low prices remain low for few years, the Saudi regime will suffer seriously. That might be very tempting for Iran.

 

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India should decide on how to take advantage of the oil prices of oil fields and also the shares of giant oil companies. India has a choice: Should it buy oilfields or should it buy shares in existing giant oil companies? This writer feels that the Indian PSU Oil establishment would prefer to guide the government to buy new oilfields, go in for exploration and generally spend  money on a huge scale for long time. But this writer feels that the best course for the government would be to buy shares in the best OIL MNCs and wait for the market to rise. Even prices of oil goes up, then the shares that India buys will also go up. That is  the way India should hedge its bets.

 

But do governments always do what is best for the country ?

 

 

Dr P Pulla Rao is a Socio-political and Economic analyst

 

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