Thursday 30 June 2022
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Oil Devaluation Will Hit OPEC; Virus To Harm China

Here's a roadmap for India to follow and get the best out of both international scenarios: get the economic policy and enable support right


Gautam Mukherjee
Gautam Mukherjee
Commentator on political and economic affairs

The story of El Dorado in the 20th century wasn’t really about gold, despite various 19th Century gold rushes that paved the cult of the Yellow Brick Road. It was about the new-fangled Black Gold instead. It fuelled most of the second half after the early discoveries in America and the Middle East. On a rising graph of both price and consumption, it dominated the economics of the First World, before the wobbles in pricing set in. And then the very powerful Organisation of Oil Exporting Countries (OPEC), almost all its members being from West Asia, was no longer the only oil depot on the globe. But it is true Saudi Arabia, now trying to sell a stake in its mammoth oil company Aramco, has played a leading role in the annals of oil politics. Sheikh Yamani, its legendary oil minister through the heyday of OPEC, thought demand for oil would be replaced by hydrogen or other forms of energy when he foresaw the end of the oil age.

But what is happening instead is its continuance, because the laws of demand and supply have dramatically tilted in favour of the consumer. Petroleum may be consumed for quite a few decades more, even as electricity, other forms of power that do not involve fossil fuel, and nuclear power too, may get longer to refine their game and affordability. But today, that day has conclusively dawned when oil has become a mere commodity, both in glut and spate. All the world’s storage vats and caverns are nearly full. But there’s ever more “on the water”, or in pipelines, headed towards the refineries around the globe. Beggar-thy-neighbour in the game of production increases and cuts, gone too vicious thrust and parry of late, has taken the entire industry to rock-bottom.

Oil is no longer a potent bargaining chip in the hands of opulent energy Moghuls. Of course, it will not trade at minus numbers in the futures market for long, even if it has done in just one such trade. Or at under $ 5 a barrel in a spot. It is already quoted in other futures contracts at over $ 20 a barrel.

But neither will oil soar into three-digit pricing again. Not unless demand outstrips the considerable supply. But what would that take? America, once a buyer of 50% of the world’s output, now has enough for its needs from its own sources. Shale Oil, which accounts for part of it, has become too expensive to produce now, but it is there if push comes to shove in strategic terms.

Russia, Britain, Norway, Venezuela, Nigeria, The Gulf, Iran, Libya, Iraq, other states from the former USSR, all have oil to sell, but little control or leverage. There are two bulk buyers — China and India — and, of course, parts of EU aggregated. It is these countries and unions that now have the major say, along with America. The US might have to buy in the quantities that Shale Oil represented in better priced times.

Nobody can cut production to the extent required to take oil upwards of $ 60 a barrel and survive today. Already, the big oil producers of West are battling significant financial deficits over servicing their quasi-welfare states. Their sovereign reserves were traditionally invested in the US and Europe, as are those of China, and are unlikely to turn out handsome dividends for a long time to come. Their real estate holdings likewise, will struggle to realise even what they paid for it in good times.

None of these countries invested in India, because they did not realise the dynamism of its domestic market and 1.3 billion population, till very lately. This new realisation accounts for at least some of the diplomatic warmth shown to India over the last six years. Other reasons could include its potential to act as a buffer to a predatory China, and the personal vision of India’s charismatic prime minister.

Now China wanted to invest, but on its own one-sided terms, that it has got away with in many other poor countries. It wanted to do so while opposing India in international fora, and via its support for Pakistan. But now that window of possibility is not what it used to be, post the Wuhan Virus. It is certainly Advantage India now, but we have to see how it plays its hand going forward.

The most recent dive in oil prices is occasioned by China shifting to natural gas. But then, gas is selling even cheaper than oil in long term contracts, from countries such as Qatar. America, meanwhile has put in an order for 75 million barrels to top up its strategic reserve. India too has done so, and expects to have filled up its own reserves of crude oil by some time in May 2020. Unfortunately, we need to store three times what we are able to at present, but have not yet built the storage capacity for 45 days or more of oil use.

The Chinese virus-induced recession could turn into a worldwide Great Depression lasting a decade. And this time it will embrace almost every country in the world dependent on international trade, including China. Particularly China. In fact, the world is in a mood to punish China for the origination, concealment and spread of the Wuhan Virus, and the death and disease it has caused. At least a proportion of the manufacturing concentrated in China is sure to move away in the near term to other countries including India. Over-dependence on China will not be countenanced by any other country in future.

And there may well be demands for running into trillions of dollars, including the freezing of China’s overseas assets and investments. Germany has submitted a bill for $ 130 billion. India has closed the door to automatic investment via the FDI route to all countries that share a border with India. NATO has warned its member states to watch out for opportunistic Chinese buying of beaten-down blue-chip stocks. Deals will be abrogated. Some African countries have already begun to do so. The Belt and Road initiative including the China-Pakistan Economic Corridor (CPEC), is likely to falter.

India however, always powered by its domestic market, could see an early recovery on the back of low fuel prices and increased bargaining power for most of its importation needs. The IMF sees a possible bounce back to over 7% GDP growth in 2021, after the severe crunch in 2020. 

Can India grow apace without significant exports? It has done in over two decades. Indian exports are mostly composed of commodities and materials such as iron ore. Finished goods are really a matter of international companies exporting their merchandise using India as a manufacturing base and some quantity of automobile and aircraft components. Finished goods include our textiles, handicrafts, cars, cell phones. All in all, our share of international trade, both in and out, is still minuscule.

Any hope of significant exports to fuel India’s growth into a $ 5 trillion economy by 2024 can only come from the high unit value armament manufacture and its export. We have made a beginning already, but there is immense potential. The import substitution it will engender is also most significant. DRDO and HAL are playing their part in this endeavour, along with other private players such as Mahindra, TATA and L&T. The Defence Manufacturing corridor launched in Uttar Pradesh is a very important part of this future thrust as well.

If India continues to buy oil for the rest of this government’s term at low prices of under $ 60 a barrel, and does not reduce rates very much at the retail pumps, it will garner a huge amount in taxes. These can be used to propel the revival of the economy. It can therefore be seen as something of a godsend, to follow on from the tribulations of the Wuhan Virus.

If India is able to combine the savings on oil imports, along with an acceleration of defence related manufacture, and the diplomatic good will earned by its recent pharmaceutical exports, it can indeed go far.

The second-stage major reforms of labour and land laws, pending since 1991, will help immensely if brought about. This, given that the government is already pushing ahead with infrastructure modernisation at a good pace. Is there a silver lining to the Wuhan Virus and its depredations for India? There could be. There could well be, provided the government shows the dynamism the opportunities call for. Chief Minister Yogi Adityanath of Uttar Pradesh has shown keen interest in attracting manufacturing interest into his state already. There will surely be others, but it will fall to the Centre to make the legislative changes that make coming to India an attractive business decision. Manufacturing many new items in addition to defence equipment could be the result.

The Stone Age came to an end not for lack of stones, and the oil age will end, but not for a lack of oil

Ahmed Zaki Yamani, Saudi Minister of Oil (1962-1986)


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