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There are many who believe that the falling oil price—it was $62.45 last week but around $105 six months ago—is a blip, and that there will soon be business as usual. As expected, conspiracy theories abound, some of which, though, may be true. It all originated, it is said, from two places in the US, Texas and North Dakota, where hydraulic fracturing of shale, known as 'fracking', was so successful that it is producing 7.4 million barrels a day. And that has given America the luxury to reduce crude import, with consequent fall in price. It is also strategically potent, as the US, with its Western allies, want Russia to lay off Ukraine and to give Russian President Vladimir Putin a whack to remember. It happened before, during Reagan's Presidency, when he decontrolled oil price. When he left, it had plunged to $22.8 a barrel. There are many analysts who think it was that price shock, rather than Moscow's Star War adventures, that got the USSR belly up. It is being said that America, by moving fast to shale oil and gas, and thus drastically reducing its own purchase of crude, wants an action replay of the 1989 story. Though no one is sure.
America also has scores to settle with Iran, a long-standing enemy with alleged nuclear ambitions. Like Russia, Iran's economy too is oil-dependent. It is believed in Washington that the oil price drop may achieve what prolonged sanctions against Iran have failed, and the country may actually submit itself to multilateral scrutiny of its nuclear facilities. And, without making a hullabaloo, America has got Saudi Arabia, its trusted ally, to make OPEC refuse to cut production, leaving Iran frothing. The arrangement also raises hope that ISIS, the new home of Islamic militants, which has access to a few oilfields, must now give more to get less. Until it runs out of guns and rockets.
The real story may not be so simple. The price drop has a sub-text which is more economic than strategic. It has been triggered as much due to declining demand as over-supply, or maybe more due to the former. And demand is dwindling all across the developed and developing world. According to OECD estimates, the 18 countries in the Eurozone are now expected to grow 0.8 per cent in 2014, against 1.2 estimated earlier. The United States has dropped to 2.1 per cent from 2.6, and Japan to 0.9 per cent from 1.2 per cent. Even China's 2015 growth expectation is under pressure after 15 years' of robust economy. India is amongst the only emerging markets which s has clawed up from 4.9 per cent to 5.7 in 2014 and expected to touch even 7% next year. And there is a distinct correlation between demand for oil in most countries, including western nations, and growth. Low oil price is therefore anything but a flash in the pan. It has come to stay longer than expected.
It means a lot for India. I think Prime Minister Narendra Modi is extremely lucky, as the price drop began within weeks of his being sworn into office in May. India imports two-thirds of its oil requirement. It is 37 per cent of country's total imports. It spent $147 billion last year in buying crude oil alone. It is more than Japan. Oil bill is the usual culprit for budget deficit, which is 4.5 per cent of the GDP now, and which Finance Minister Arun Jaitley is committed to bring down to 4.1 per cent in the current fiscal. Surely, Jaitley has a reason to smile as oil prices are likely to remain range-bound.
For a net oil importing nation,
living in a low oil price regime
globally is as tricky as walking
on a knife's edge
It is an opportunity that one hopes Modi will not allow to be frittered away. With cheap oil comes his best chance to put his 'Make-in-India' call into effect, spurring the growth of both manufacturing and services sector. Cheap oil is also a boon as it is expected to bring down inflation and make economy buoyant. After all, Indian economy has been passing through a very bad patch for the past several years and Modi rode to power on the back of bringing "achchhe din". He knew more than anybody else there is no magic wand to bring good days in 100 days. But the Gods are smiling on Modi as retail inflation has slipped to 4.3 per cent already, thanks to falling oil prices and seven months of 24X7 tough administrative control over his ministers and bureaucracy and marketing India abroad in a manner none of his predecessors did. The world is looking towards India as the most favoured investment destination as options have dried up in China, Brazil, Turkey and Russia. A steep fall in inflation has built the groundwork for a cut in interest rate and RBI Governor is under extreme pressure to act before the Budget.
But the story doesn't have a happy ending guaranteed. If so much over-supply of oil has resulted from falling demand along a wide arc of the developed world, it is therefore not right to expect that India will still have many places to export its products and services. But it will still need to meet its import commitments, though the oil bill will be far less than before. The mismatch between export and import will show up in a widening trade deficit, and the consequent current account deficit. When that happens, nobody can tell how much will a dollar cost in rupees.
The remedy is to limit India's import bill-by formulating an efficient coal policy, improving energy efficiency across the economy, making things for the domestic market at below-China cost, and exporting to focused markets items on which we have comparative advantage. If Obama can cut 7% oil consumption in 5 years why can't we. Its time Modi cuts oil consumption by introducing fuel efficient technologies in auto and sectors, promotes conservation and introduces compulsory cycling tracks across India. He can begin with these tracks in 100 smart cities.
If the world is heading to a fall in demand, it's not the brightest idea to try and replicate china's success story as the "workshop of the world". That was a different century and a different world. For a net oil importing nation, living in a low oil price regime globally is an tricky as walking on a knife's edge.
(The author is
National Editor of
Lokmat Group)
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