Business Economics & services team (BEST)
Will Oil Loose Its Shine ?
As expected, the OPEC has voted against cutting back oil production to stem the falling prices. Is there any method in the madness? What are the reasons for the roll over of the production target? If one expects that answers to these questions are simple and straight forward, he or she is living in fool's paradise. Oil economics is mired in complexities, intrigues, double speaks, cut backs and what have you. Earlier, the oil world was divided into two: producers and consumers. Hegemony of producers have led to non producers exploring oil wealth and some of them have succeeded, some partially and the rest failed. When more countries and economies have emerged as oil producers, there was division among them as poor and rich oil producers and newly oil found countriesl. Over the years, a number of sub-groups emerged such as shell gas producers, producers who can meet domestic demand partially and those who have to resort to import in varying degrees for meeting the demand.
Every oil consuming country stands to benefit from the cut in oil prices, which pundits believe are on two counts. One excessive production, which has led to a glut in the market, which exerted a downward pressure on oil prices and two cutting down the cascading effect cast by increased oil prices on their economies. In the immediate run, it will impact on the prices.
A slowdown of the manufacturing sector and its consequent impact on the economic growth necessitate only lesser imports of oil at a time the international prices are ruling very low. The oil price cut has given a reprieve to economies like India, which often face current account deficit on account of mainly heavy oil imports. But, imports of non-merit goods like gold, luxury items etc have gone up partially offsetting the benefits accrued under the oil price cut. Also, its beleaguered manufacturing sector is refusing to budge and buck the trend. Ideally, a country like India can reap profits from the price cuts only when its investments picks up. The foreign exchange saved from lower oil rices can be used for importing capital goods, which go into the manufacturing sector. In the absence of such a shift in import demand, oil price cut may become a zero-sum game
The grapevine making the round amidst the deep oil cuts is the arm twisting the US and its axis group in oil production are indulging in to ensure their hegemony in the oil economy. The Russia-US diplomatic relations, perhaps is at the lowest ebb in the recent times. Ukraine issue has almost isolated Russia from other developed countries. The steadily eroding Ruble against dollar and the low realization of Russia from the oil sector on account of low prices are well-known. There are also unsubstantiated news or mere rumors about Putin's health, which is also putting great strains on the Russian economy. if the low prices continue, sooner or later Russia will be hard hit.
It is also true that the US and Saudi Arabia cannot afford to have a low oil price for ever. Shell gas production in the US is expensive and once the oil prices hit the bottom, it will not be economical for the US to mine shell gas. So, they also need a price recovery. Of course, the US and Saudi Arabia csan wait for some more time unlike the poorer countries like Venezuela, Algeria and Iran etc, who are already reeling under the impact of low prices.
What will be the game plan of the US? They know very well that the price slump can be managed for sometime. In the meantime, great damage will be caused to the smaller oil producing countries. Some of them will put the oil wells on bloc and others may vacate the field at least for a short term. In the meantime, gaining from the low oil prices, economies like China and India will recover. The demand will shoot up several notches above the present level. That time, they will emerge as the winners reminding one about the old adage: "head I win tail you loose".
Will Oil Loose Its Shine ?
As expected, the OPEC has voted against cutting back oil production to stem the falling prices. Is there any method in the madness? What are the reasons for the roll over of the production target? If one expects that answers to these questions are simple and straight forward, he or she is living in fool's paradise. Oil economics is mired in complexities, intrigues, double speaks, cut backs and what have you. Earlier, the oil world was divided into two: producers and consumers. Hegemony of producers have led to non producers exploring oil wealth and some of them have succeeded, some partially and the rest failed. When more countries and economies have emerged as oil producers, there was division among them as poor and rich oil producers and newly oil found countriesl. Over the years, a number of sub-groups emerged such as shell gas producers, producers who can meet domestic demand partially and those who have to resort to import in varying degrees for meeting the demand.
Every oil consuming country stands to benefit from the cut in oil prices, which pundits believe are on two counts. One excessive production, which has led to a glut in the market, which exerted a downward pressure on oil prices and two cutting down the cascading effect cast by increased oil prices on their economies. In the immediate run, it will impact on the prices.
A slowdown of the manufacturing sector and its consequent impact on the economic growth necessitate only lesser imports of oil at a time the international prices are ruling very low. The oil price cut has given a reprieve to economies like India, which often face current account deficit on account of mainly heavy oil imports. But, imports of non-merit goods like gold, luxury items etc have gone up partially offsetting the benefits accrued under the oil price cut. Also, its beleaguered manufacturing sector is refusing to budge and buck the trend. Ideally, a country like India can reap profits from the price cuts only when its investments picks up. The foreign exchange saved from lower oil rices can be used for importing capital goods, which go into the manufacturing sector. In the absence of such a shift in import demand, oil price cut may become a zero-sum game
The grapevine making the round amidst the deep oil cuts is the arm twisting the US and its axis group in oil production are indulging in to ensure their hegemony in the oil economy. The Russia-US diplomatic relations, perhaps is at the lowest ebb in the recent times. Ukraine issue has almost isolated Russia from other developed countries. The steadily eroding Ruble against dollar and the low realization of Russia from the oil sector on account of low prices are well-known. There are also unsubstantiated news or mere rumors about Putin's health, which is also putting great strains on the Russian economy. if the low prices continue, sooner or later Russia will be hard hit.
It is also true that the US and Saudi Arabia cannot afford to have a low oil price for ever. Shell gas production in the US is expensive and once the oil prices hit the bottom, it will not be economical for the US to mine shell gas. So, they also need a price recovery. Of course, the US and Saudi Arabia csan wait for some more time unlike the poorer countries like Venezuela, Algeria and Iran etc, who are already reeling under the impact of low prices.
What will be the game plan of the US? They know very well that the price slump can be managed for sometime. In the meantime, great damage will be caused to the smaller oil producing countries. Some of them will put the oil wells on bloc and others may vacate the field at least for a short term. In the meantime, gaining from the low oil prices, economies like China and India will recover. The demand will shoot up several notches above the present level. That time, they will emerge as the winners reminding one about the old adage: "head I win tail you loose".
