Oil bullying: Love me, love my dog

Oil bullying is not a new phenomenon, and has been part and parcel of oil politics for a long time. In a globe clearly divided into camps of ‘haves’ and ‘have-nots’ (in oil and gas perspective), the growing instances of latter being victimised by the former is quite natural. Earlier US, largely an oil-importing country, was the only original Big Bully doing anything it wished to do for its energy security. It used its oil-giants in bullying the suppliers, but those were the good old days. In the current scenario of growing global energy requirement and increasing price hike, there is resurgence of several oil bullies, notwithstanding US influence. Now the players have changed and so has their mission.

Presently, Russia, the largest exporter of gas and second largest exporter of crude oil, leads the pack. Under the Putinist rule, it made every effort to regain the super-power status, by making deliberate attempts to spread its tentacles all over the Europe and CIS. Europe’s thirst for gas made itself a very easy target. Even before Russia had started making inroads into Europe, it had tried to influence foreign-policies of several CIS partners. Russian refineries, which had subsidiaries in many of these countries, had stopped making supplies in guise of 'maintenance shut-down or commercial consideration', as and when a government of choice was not elected or a suitable bill was not passed in their parliaments. Ukraine, in 2005, suffered from its 'old ally'. Recently Russia stopped making oil supplies to another one time ally-Czech Republic- when the latter signed a missile treaty with US, it was merely a replay of the old game. Russia also tried to influence many countries to sell their natural gas companies to Gazprom, or face the consequence of ’No gas for you'.

The bad news for oil-importers' camp is that oil-bullying is a growing tribe, though sometimes in a very veiled manner, with many new and unruly players gaining prominence. Thanks to the growing demand of oil, some of these players even use their prominent clients (oil importers) to gain international recognition and thus continue the misrule, like Sudan and Myanmar did with help of China.

Certainly not good days ahead.

Oil: Is there any light in sight?

Oil-price hike is most probably the hottest topic today. Ask anyone about the issue and chances are, he will surely have some view-point. Viewpoints depend a lot on on whom you are talking to and this makes the understanding of the problem even more difficult. OECD members blame the growing demand from emerging countries like China and India, exporting countries put the blame on weakening dollar, importing counties but the blame on oil producing countries and so on. The prices are certainly complex function of all the above and lot more. Since more than 80% of the global population is bearing the brunt, I am trying to make a layman understand the complexities involved, through this post.


Logically price is a function of demand and supply but in current context, the price is really not following strictly the laws of economics.Geo-politics, increasing fear of depleting oil and peak-oil theory (and not having any alternative of oil even after 130 years), increasing demand by China and India (the growing demand centres) and lastly a weak dollar (mode of transaction of more than 95% of oil trade) seem to be the main contributors of this problem.

After a stable or depleting North Sea (Europe) and Gulf coast (N America)oil-fields, Mid-east, Africa, Russia and S. America are feeding the global crude oil requirement.Unfortunately all these regions are politically unstable. US-Iraq, US-Iran, Israel-Mideast, Nigerian attacks are affecting the price, creating panic amongst the buyers.

Off late, China and India has started showing their presence in the energy market. Emergence of manufacturing sector, growing numbers of vehicles and domestic consumption have been the main factors. The demand in these countries is increasing at a much higher rate than global average, whereas OECD consumption growth is negative. Without doing much number crunching, a quick glance over the energy-globe will give a fair idea. Increasing presence in Africa (where many oil producing countries are situated) as investor and buyer is a testimony of their growing demand. And none of the present studies show any decline in consumption in a five-year time frame, to say the least.

On the other hand the supplies is dwindling. Oil is a depleting resource .Peak oil theory endorses that the oil production is decreasing and within a span of 60-70 years (this figure is highly debatable) oil may start showing disappearing signs. The major oil-fields are already seeing decline (Africa is a likely exception) in production and not many new finds are substituting them.Growing demand and declining supplies are deadly combination for further price hikes. With no clear commercially exploitable alternative in sight replacing crude oil, a bleak and black future awaits oil importing countries.

Weakening dollar is also doing its bit.Crude transactions are mostly in dollars and a weak dollar certainly does not help. Weak dollar reduces the value of crude for producers (when the buyers' currency is not dollar) and hence in return the price increases to offset the same. Though Iran is the first major oil-producing country ( though Iraq was also supposed to have done it in the past) to convert to euro, the decision is more politically motivated. Moreover euro cannot be seen as a threat to dollar at present, because of difference in magnitude of transactions done in both currencies. This leaves a strong dollar only bet for oil importing countries.

All said and done,it is very difficult to finally single-out one reason for this price hike. It is a complex function of above and much more. High corruption in many oil-producing countries, ongoing civil wars etc add on the speculation and keep the prices abnormally high. Prices of US$ 200 per barrel, which at present seem to be highly speculative (and it is so) can become reality in few months, as it happened with price-forecasts of US$ 100 and US$ 125 per barrel.

Till then read this blog and enjoy.

On June 04, 2008, when the minister of petroleum and natural gas declared the petroleum price hike, it was hardly a surprise. It had become a necessity, rather. And the entire credit for creating a mess goes to our own elected politicians.

Politics was always a dirty game, and politicians have made it dirtier. Adding oil has made it murkier. The government seems to look like a set of corporate profit-centres or strategic business units (SBUs) and each vie for their own pie. So far so good, but the problem starts when these units stop thinking of achieving a common ‘corporate’ goal. Rather than tackling the oil price problem as a whole, it starts taking shape of a dog-fight between the Ministry of Finance (MoF) and the Ministry of Petroleum and Natural Gas (MoPNG), not to be left behind, the other ‘oil-price hike’ affected ministries, like fertilizer, heavy industries, railways, etc. MoF’s target is to achieve the revenue target (central and state tax/duty and dividend revenue from oil sector is almost 20% of the entire government collections) and only intense lobbying helps if tax needs to be reduced. Although, tax and levies are abnormally high and make the retail selling prices higher, nobody wants to touch it even with a barge pole. States are equally responsible for charging heavy tax, which in some cases is ~20-30%. The result is a price, which hurts the pocket of masses.

India imports 72% of crude, and the entire purchase is dollar-denominated. A depreciating rupee makes the matter even worse in case of spiraling prices. Even if there is no further increase in price (~US$ 130/barrel) and estimated demand (~120 TMT) of crude for 2008-09, we will be handing over US$ 100 billion to oil-exporting countries in Mid-east and Africa. In such a case, a foreign exchange reserve of ~ US$ 300 billion (as on Mar 2008) does not look too much, considering a developing country’s voracious need for money. Volatility of crude price is beyond out limit and all oil-importing companies are merely victims of this situation.

There are lot many discrepancies (other than tax and duties) in petroleum pricing in India and hence should be tackled immediately. Artificially lowered diesel prices have encouraged many industrial units to use it in place of furnace oil, which, though, an inferior fuel is costlier because it is linked to global crude prices. If we compare only crude-oil price with the product-prices, we will be in a better condition to appreciate the fact. Only Indian retail petrol price is higher than the current crude price, prices of rest- diesel, LPG, kerosene- are lower. Other associated logistic and manufacturing costs are over and above this. The question is- Who is paying for this? The answer is, directly it may be the oil companies, but ultimately the entire country is going to face the music. Fuel-subsidy in India, at current prices, will be ~ 2.2% of GDP or ~ 50% of entire fiscal deficit. The communists or other protestors against the price hike will soon realize that ultimately it is going to hurt the poor masses and in a much severe manner. Further worsening of this condition can have cascading effects on the economy, such as currency depreciation, interest rate hike, higher prices and even downgrading sovereign rating etc.

We are going to face tougher days ahead, if the conditions do not change for good. This price hike does not seem to have any fundamental basis (supply-demand situation). Rather it is driven out of theories spread by panic-stricken buyers (who believe that crude oil reserve is going to be end tomorrow) and greed-stricken sellers (who deliberately believe these theories to be true). This price hike is surely going to hit the global consumption as well. No one knows when this is coming to an end and if US$ 200/barrel is going to be a reality, prudence may be the only solution.

Amen!