Expectation of benevolent oil stars

K Raveendran

Astrology columns are often seen to forecast subjects of certain planets facing the risk of grave danger from fire and water, sometimes even life-threatening. It is not known if crude oil has a ruling planet of its own, but geo-political developments on the earth have been found to cause wild swings in oil prices. There seems to be something in Prime Minister Narendra Modi’s horoscope that brings him luck by way of oil. One does not know if it is due to his Ghanchi caste, which has traditionally been a community engaged in selling oil, just like the Telis of north India.
Modi was lucky to reap the benefit of an oil bonanza when he took office in 2014 as it coincided with a crash in global crude oil prices. Since he assumed charge in May, the price of the Indian basket of crude oil crashed from $113 per barrel to $50 by January. The dream run went on for another year when the price further tumbled to $229. This put the Modi government in a unique situation to manage the fiscal deficit and allocate resources to the new government’s priority programmes, if there were any.
Modi even used to sell his luck. “Ok, let’s accept that I am lucky but you have saved money. If Modi’s luck is benefitting the people, what can be more fortunate? If due to my good luck, prices of petrol and diesel come down and common man saves more, then what is the need to bring someone who is unlucky?” he was once quoted as telling an election rally in Delhi. But irrespective of his claim, people were not so lucky as his government kept increasing the tax on petrol and diesel, which forced them to part with almost the same money they had been paying when the international oil prices were high.
As 2018 approached, the oil stars in Modi’s horoscope apparently started looking away. International crude oil prices were climbing consistently and, with dynamic pricing of petroleum products in place, this meant that consumers had to dish out more for the same quantity and discontent was growing as people felt that the government was helping the oil companies to surreptitiously make more money. But with the announcement of Karnataka elections, the oil companies froze the hikes, although the government feigned ignorance about why the companies did so.
But the reason became clear when BJP lost nearly all subsequent by-elections, held after the companies resumed raising the prices with a vengeance. There was big hue and cry as prices hit historical highs even surpassing the peak of the crude oil price boom, although that phase did not last long as developments in the international oil market forced a reverse and the local companies started re-adjusting retail prices accordingly. Of course, it began with a farcical drama of a one-paisa cut, for which the government drew flak from all around. As the situation seemed to be turning normal, there is another scare now by way of the falling value of rupee, which automatically implies higher outgo for crude imports and further strain on the fiscal deficit and therefore the prospects of more hikes in retail prices.
But as Modi’s luck would have it, by the time he is about to vacate office, maybe his oil stars are moving into their new ‘houses’ and things would again turn favourable. Indications of such prospects are already visible as the crude producing countries are re-thinking their strategies for obvious reasons. In fact, the recent reversal of the price increase started with OPEC leader Saudi Arabia brokering a deal with Russia and members of the cartel to turn the tap open for more oil to flow into the market. Crude oil prices plunged by 7 percent in two sessions as Saudi Arabia and Russia confirmed their decision. This was followed by a meeting of OPEC deciding to add one million barrels per day of crude production across the cartel members to stabilise the market.
Obviously, the producers are seeing the writing on the wall about the future of oil as the primary energy source. Speculative froth in the oil futures markets has already vanished, replaced by a new trading calculus based on the realities of supply and demand. It is no small thing that the market has taken in its stride such a serious development as Trump’s embargo on Iran, which at other times would have led the market to go through the roof. The new thinking by the oil producers has been prompted by the realisation that the future of fossil fuels is limited and there is no point in keeping huge reserves of a resource which may be of little value in future.
The producers have realised that they need to make the maximum use of their reserves in the limited window of opportunity that is still available as fossil fuel burning for energy gives way to new technologies and the world, driven by climate change priorities, moves towards a carbon-free regime. By OPEC’s own estimate, the number of electric vehicles on the road in two decades’ time will touch some 266 million. Just one year ago, this estimate was 10 times smaller, indicating the past at which the market is changing.
This means that Saud Arabia, Iraq and Russia will all seek to produce and export as much as they can, to monetise their oil reserves before demand for the black gold shrinks over the next decade. As each OPEC member seeks to maximize revenue, the only credible scenario is for a price war for retaining market share. Already market operators are talking in terms of crude prices at $56 a barrel. And all this is possible before Modi’s time runs out. That could well be another spell of good luck for him. (IPA)

Tuesday, 10 July, 2018