Saturday, 27 December 2014

The bonanza / disaster of 2014

As the year draws to a close it is customary to review the year gone by. What do you think was the most significant event of 2014 ? Some would say Ukraine. A few might vote for Ebola. Still others might say ISIS. What about the missing Malaysian Airlines plane ? Others might say the Indian elections. Many in my part of the world might even say Lingaa :)

In my opinion however, the most significant happening of 2014 was the steep fall in the price of oil. In June 2014, Brent crude stood at $110 a barrel. Today it is at $ 60. This has profound ramifications on both the economics and politics of the world.

Because of the world's dependence on oil as the primary source of energy, there has been a massive transfer of wealth over the last decade or two from the poor to the rich. Most of the world's nations are oil importers. A few, blessed by sheer geographical luck are oil exporters. Wealth has gushed from the former to the latter for years now.

With the step decline in the price of oil, the tide has turned. The oil exporters are facing economic disaster. The hardest hit is Russia - a kleptocracy that has frittered away the oil boom years, now suffering from the twin effects of falling oil prices and the sanctions over Ukraine.  The rouble has crashed and they have been caught pissing in to the wind  (apologies to this blogger !). Next in line is Venezuela, another country that wasted the good years. Iran is yet another sufferer. Even mighty Saudi Arabia is vulnerable. The following chart shows the lot that is in trouble.

The rest of the world is a winner. Inflation, world over, has come down. Global GDP may raise by 0.5% or so, purely on account of oil price. The US and China are the biggest beneficiaries. In fact the booming shale gas production in the US, coupled with weak economic growth globally has caused the fall in price of oil. As an aside, the tree huggers in the UK and elsewhere in Europe who have been blocking every move to frack in Europe must be forced to pay $110 a barrel for oil and not benefit from the effect of the shale gas revolution in the US.

Poor countries across the world have benefited from lower oil prices and have been able to curb inflation. India is the biggest beneficiary of them all. Inflation in India has steeply fallen solely on account of oil prices. Petroleum subsidy has fallen so much that the government has raised taxes on petroleum products and at the same time decontrolled diesel prices without a squeak from the public. The fiscal situation would have been a far greater disaster but for the unexpected bonanza. 

Oil prices will probably recover, but are unlikely to go back to three figures in the near term. That might have larger consequences. Inflation can be held in check. Funding to the Islamic jihadists, which has largely flown from oil money is likely to be constrained. Russia is unlikely to repeat its misadventures as in Ukraine. The oil producers such as Venezuela and Nigeria, who are most affected will be forced to adopt more sensible economic policies which can only benefit them in the long run. All in all, we can ring in the new year with a feel good factor.

PS : This blogger owes an apology for going AWOL for 2 months and is deeply thankful to his readers who have all been very kind and encouraged him to "come back"


Sriram Khé said...

Looks like you took two months off in order to redesign your blog. Seriously, you needed two months for that, when you don't have a full-time job? ;)

Indeed, 2014 was about a lot of surprises, and oil is definitely one of those. None of the "pundits" I follow even vaguely predicted a slight fall in the crude oil prices, leave alone a steep fall. The world continues to be unpredictable despite all the experts all over. As Yogi Berra noted, predicting is difficult especially about the future ;)

You didn't refer to one downside though--the low oil price will encourage more fossil fuel consumption, will make alternative non-carbon energy relatively even more expensive, and make climate change discussions that much more difficult. I am "pissed off" ;)

Ramesh said...

Ha Ha. I am code challenged.

Yes, nobody predicted this. In fact both companies and nations covered long at high oil prices and are still unable to benefit from the fall. Forecasting is a mugs game.

True - the impetus behind cleaner energy will fall. Especially in the US where the rabid right will shout even more against anything clean. China is unlikely to go slow though - the massive investments they are making on solar will start to yield results and they won't slow down for they see oil as a geopolitical problem and not an economic one.

Jim Bauer said...

In the U.S. I certainly see the sharp decline in oil prices to be provide a massive boost to the economy. Americans have been cash strapped for such a long period, any relief will be helpful. Plus, with extra spendable cash to go around, I think this helps bolster jobs levels. This may be just what the doctor ordered to jumpstart the economy, despite the economic woes it creates in other parts of the world.

Ramesh said...

Thanks for visiting the blog and for your comment. Yes indeed, America has benefited considerably and I would argue very justly, because it is the shale gas revolution in the US that has mostly contributed to the decline in oil prices. This should be good fillip to the long suffering American middle class.

However the jury seems to be out on whether such a steep decline would actually bolster global economic growth. The oil industry is an important component of growth and they will suffer deeply. A more gradual decline may have been better for growth - violent swings may have unpredictable consequences.

Ballantine said...

I have noticed the price of oil has gone down. Usually the cost of gas increases around the holidays, when people are likely to travel more. It stayed down throughout the season, which was a definite surprise.

Deepa said...

Oh wow, this place looks very swanky. Yes indeed, the lower prices at the petrol station did make one smile everytime we passed by one, but your last paragraph took the feel-good-feeling to the next level. You must have been up to something, the new cool look, the positive look-back on this past year and beautiful thoughts for the future! I sniff fish!

Shachi said...

Ooh love the new look and the "About Me" - where I expected "Rajalakshmi" in a cameo appearance ;).

Yes, the oil prices have made me smile, more than once. Summer is when they peak, so let's see if the downward trend continues.

An optimistic post to end the year - thank you :)!

Ramesh said...

Thanks Deepa. Yeah I've been smoking weed :):)

Take a driving holiday to all 50 states. That's the way to celebrate low oil prices. Alas, still not $1 a gallon !

Ramesh said...

Mmmm, I've to wake Rajalakshmi up from her slumber :) Yes, I'm sure there are smiles at the petrol pump (I won't say gas station!). Wonder why Obama is not claiming the credit or somebody is attributing the credit to him. After all if gas prices rise, its always the President's fault.

Sandhya Sriram said...

Wow Wow Wow, I first thought, i have landed at a wrong page - this is an amazing makeover to your blog -- Way to go Ramesh.

For me, the worst consequence of Oil Money is terror funding - though, i do not really know if falling prices would change this substantially. its a vicious circle which funds itself.

Hoping that you get back to your regular blogging sphree again. Rajalakshmi and Ramarathinam have been missing on your posts for some time. why not, something with them for the new year eve :-)

Ramesh said...

Thanks Sandhya. As always, you are very kind.

Yes, terror funding is a major major issue, directly linked to oil revenues. A major change has to happen in Saudi Arabia for this to be dampened.

Unknown said...

Hi Ramesh:
Happy new year!
Oil prices had been kicked up and sustained by speculators (much like Sensex). They will return once the dust settles and the downward movement stops - with a vengeance. It is just that they must be figuring out the latest unknown variable - shale gas, Russia's intent and China's new normal of Growth.
12 months later we may end up pretty much where we were. Let's see.

Ramesh said...

Hi Kumar, Thanks for visiting and leaving a comment. Very happy 2015 to you too.

Yes speculation has accentuated the swings, but I don't think its only that. Fundamentals have affected it more, I would suggest - shale gas, lower global growth and Saudi Arabia's unwillingness to be the swing producer. Prices may very well go up again back to where it was (anybody predicting oil prices is sure to get it more wrong than right), but hopefully it would stay low for some time at least - purely in India's self interest.

Venkat said...

Many wishes for a new year, may the shale production spread all over the world in coming years an be alternative to crude. lets us have more and more alternatives.

Ramesh said...

Thanks Venkat, and new year greetings to you too. Amen to your view - May shale gas production increase forever !

Ravi Rajagopalan said...

This will hit inbound remittances at some point - some $30bn of which comes from the GCC countries. If I were the Chief Minister of Kerala, instead of wasting my time trying to impose prohibition, I would be seriously worried about what would happen when the mallus start to come home.

Ramesh said...

Yes, Ravi, an angle I had not considered. Kerala must be worried.

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