Oil prices could plunge to $60 if OPEC does not cut output

[asianobserve]

What are the chances of the US trying to spread "democracy" (wink wink) in Saudi Arabia?

The US already succeeded in India (wink, wink). Next will be Russia.

And Saudi, I guess the best is saved for last...

 

[pmaitra]

The US already succeeded in India (wink, wink). Next will be Russia.

And Saudi, I guess the best is saved for last...

Ok, now please answer my question. What are the chances of the US trying to spread "democracy" (wink wink) in Saudi Arabia? I don't care whether it is best saved for last or first.

 

[asianobserve]

Ok, now please answer my question. What are the chances of the US trying to spread "democracy" (wink wink) in Saudi Arabia? I don't care whether it is best saved for last or first.

I don;t know. What do you think?

 

[pmaitra]

I don;t know. What do you think?

I don't know, but I can speculate. The US is secretly courting Iran, and Saudi Oil Fields are in the eastern parts of the country, where the Saudi Shias are concentrated.

Closely follow the US State Department declarations. As a rule of thumb, most likely, the opposite is true.

 

[asianobserve]

I don't know, but I can speculate. The US is secretly courting Iran, and Saudi Oil Fields are in the eastern parts of the country, where the Saudi Shias are concentrated.

Closely follow the US State Department declarations. As a rule of thumb, most likely, the opposite is true.

That needs a lot of imagination. I think the latest Iran engagement is not because of alienating or dropping Saudis but it is really of trying to stop the nuclearization of the Middle East (a harrowing spectre for US war planners).

The US friendly overtures towards Iran I think is more on strengthening the hands of Rouhani agianst the hawkish section of the Iranian military and government. I think it is aimed to show to the Iranian people that there are immediate tangible benefits that can be had from talking to the international community about Iran's nuclear weapons (which is popular to both religious and liberal sections of Iran population).

But I think what the Americans did to Mubarak (withdrew support during height of pro-democracy demonstrations) will not be done to the Saudi Royals. But the Saudi's are genuinely concerned about US' Iran engagement. It's a tight balancing act.

On the other hand, I believe Saudi's refusal to cut oil production on the face of global oil glut is directed more at pressuring the Iranians further to negotiate its nuclear ambitions than crippling American shale oil producers. Note that Iran is already suffering from Western economic sanctions. The oil price rout is really hurting them now. But of course, the Saudi's already fought American oil producers before in price war in 1986 that resulted in a lose for the Americans. The Saudi's may again engage in the same effort, but as I said we need to watch out what the Saudi's do next (increase further its production or maintain current levels).

 

[pmaitra]

That needs a lot of imagination. I think the latest Iran engagement is not because of alienating or dropping Saudis but it is really of trying to stop the nuclearization of the Middle East (a harrowing spectre for US war planners).

The US friendly overtures towards Iran I think is more on strengthening the hands of Rouhani agianst the hawkish section of the Iranian military and government. I think it is aimed to show to the Iranian people that there are immediate tangible benefits that can be had from talking to the international community about Iran's nuclear weapons (which is popular to both religious and liberal sections of Iran population).

But I think what the Americans did to Mubarak (withdrew support during height of pro-democracy demonstrations) will not be done to the Saudi Royals. But the Saudi's are genuinely concerned about US' Iran engagement. It's a tight balancing act.

On the other hand, I believe Saudi's refusal to cut oil production on the face of global oil glut is directed more at pressuring the Iranians further to negotiate its nuclear ambitions than crippling American shale oil producers. Note that Iran is already suffering from Western economic sanctions. The oil price rout is really hurting them now. But of course, the Saudi's already fought American oil producers before in price war in 1986 that resulted in a lose for the Americans. The Saudi's may again engage in the same effort, but as I said we need to watch out what the Saudi's do next (increase further its production or maintain current levels).

Good analysis. You might be correct. We shall have to wait and see.

 

[pmaitra]

A mixed blessing for India

The Oil Ministers of 12 member states of Organization of the Petroleum Exporting Countries (OPEC) concluded their meeting in Vienna on November 27 by deciding to continue with their three-year-old production quota of 30 million barrels per day (mbpd). Thus, they calculatingly ignored nearly one mbpd oversupply in the global oil market which has pushed the crude prices down by over 30 per cent since June 2014. The global oil glut, in turn, has been caused by a number of factors which include OPEC's own overproduction, rising non-OPEC production (particularly by the U.S.-based "Shale Revolutionaries") and lower demand from China and Europe. By declining to cut their output to shore up the prices, OPEC in general, and Saudi Arabia in particular, have refused to play the role of global "swing producer."

As the world's fourth largest importer of crude, India can afford to exult at this precipitous crude price decline. Still, given the strategic importance of this development, a more comprehensive analysis is desirable.

A virtuous cycle in the economy

From the limited perspective of India's consumer economy, lower global oil prices undoubtedly augur well. Lower pump prices reduce pressure on the consumer who can spend the savings elsewhere, spurring the demand side of the economy. As petroleum products form a large part of the consumer price indices, lower crude prices result in reduced inflation, which in turn paves the way for lower interest rates and greater buoyancy in investments. Thus, lower oil prices can trigger a virtuous cycle in the Indian economy. After all, with India's imports running at an estimated 3.7 mbpd in 2013, a $30/barrel decline in oil prices amounts to a $40 billion savings bonanza on annual imports. The impact would be best felt on the petroleum sector where marketers have been groaning under subsidy burden. The transport sector would also be a direct beneficiary.

If we widen the impact analysis to consider the totality of the Indian economy, some challenges also appear. First, as oil producers are India's major markets and investment destinations, their economic decline may affect the country. Recent decline in the share prices of Bharti Airtel and Bajaj Auto due to the devaluation of the Nigerian Naira illustrates this more complex trend.

Second, apart from being the fourth largest oil importer, India is also the world's sixth largest petroleum product exporter earning over $60 billion annually — nearly a fifth of global exports. A bearish oil market would hurt this segment with reduced demand, lower unit prices and lower margins.

Third, the oil price decline coincides with resumed foreign interest in investing in India. It is difficult to assess their mutual correlation, but lower oil revenues may attenuate arrival of petrodollars into India.

Fourth, whenever oil revenues decline, countries that export Gulf oil try to tighten their belts by emphasising local production and downsizing their foreign labour force in which Indians dominate. Thanks largely to over five million Indian expatiates there, India was the world's largest recipient of remittances which topped $70 billion in 2013. The possibility of these remittances being reduced cannot be ruled out. This would have a serious impact on remittance-dependent States such as Kerala and Goa.

Fifth, lower crude prices may cast a shadow over the sputtering controversy over natural gas pricing norms in India as the latter generally follow the oil prices. Future investment decisions in oil-related sectors may get delayed.

Sixth, lower pump prices may cause higher fuel consumption as sales of automotive products soar. This would worsen commuter woes as well as cause increased urban pollution.

Finally, a decline in oil prices generally accompanies a global decline in commodity prices, particularly those of minerals and agricultural products. India remains a major exporter of these and would see lower realisation, particularly of Guar Gum, a critical input for the shale industry.

The long-term impact of lower oil prices is likely to be felt beyond the economic domain. Geopolitically, persistent lower oil revenue could propel a number of emerging exporters towards domestic political instability as the ruling elites lose their capacity to provide "stomach infrastructure" to the common man. Countries with lower per capita oil revenue such as Nigeria, Iran, Algeria and Venezuela may be more at risk. In general, however, lower oil revenues may have a dampening effect on regional or domestic disputes.

 

[asianobserve]

@pmaitra

India should have something like these developed so that it can take advantage of slumping oil prices:

The Shibushi oil storage depot, part of Japan's strategic petroleum reserve. Japan, the United States and many European countries have reserves like these dotted around their countries to be used in the event of a sudden oil shortage.

 

[pmaitra]

@asianobserver, bad idea. India has a better idea.

 

[jamesvaikom]

@sgarg, according to this analysis, Russia is not the target of the glut in oil production. Russian, Venezuelan, and Arab representatives decided not to cut production of oil. It is necessary to absorb losses so as to kill the US Shale Oil producers, and so as not to lose market share, because, doing so, would be to work in the interest of its competitors, which is US Shale Oil producers.

US is a net importer of crude oil. US Govt. can help shale oil companies if they wish. They can reduce tax for oil production and increase tax for oil imports. They can also do combination of high import tax and use that money to subsidise petroleum products. This will help both consumers and shale oil companies. If they can introduce anti dumping charge on solar panels then why can't they do the same on OPEC countries which are forcing US shale oil companies reduce investments.

 

[sob]

@pmaitra,

The article that you posted from Hindu had a very valid point. Low fuel prices would mean a soaring demand for the fuels and apart from the commuter problems, the bigger problem would be when the fuel prices start climbing again. Capping the demand will not be easy in our country.

To address this issue the Govt. increased the excise duty on fuel around 2 weeks back. There was no impact on the retail prices as the oil companies were planning to reduce prices. The Govt. has indicated their resolve that with further drop in the international prices they are ready to raise the taxes so that the prices remain stable.

This gives it the lee way to reduce taxes when the international prices go up.

 

[amoy]

@sob echoing your recommendation Chinese govt raises the fuel taxes eff. today to "stabalize prices"

 

[asianobserve]

@pmaitra,

The article that you posted from Hindu had a very valid point. Low fuel prices would mean a soaring demand for the fuels and apart from the commuter problems, the bigger problem would be when the fuel prices start climbing again. Capping the demand will not be easy in our country.

To address this issue the Govt. increased the excise duty on fuel around 2 weeks back. There was no impact on the retail prices as the oil companies were planning to reduce prices. The Govt. has indicated their resolve that with further drop in the international prices they are ready to raise the taxes so that the prices remain stable.

This gives it the lee way to reduce taxes when the international prices go up.

Apart from beefing up strategic oil reserves this is the best time for India to drastically reduce or remove its subsidies on certain petroleum products.

 

[sob]

@asianobserve, Subsidy is over for petrol and diesel.

LPG they are trying to reduce, but Kerosene they will not be able to touch. It is politically too hot for the Govt. to tinker. At best we might see a marginal price hike on Kerosene.

 

[sgarg]

The low oil price will hurt several oil producing States. Russia has the highest ability to withstand low oil prices because of its diversified economy.

All Russia needs is 20B food and 100B engineering goods imports to survive. The wasteful expenditure can be trimmed.

It will be very hard to put down Russia.

 

[sob]

The low oil price will hurt several oil producing States. Russia has the highest ability to withstand low oil prices because of its diversified economy.

All Russia needs is 20B food and 100B engineering goods imports to survive. The wasteful expenditure can be trimmed.

It will be very hard to put down Russia.

Got to admit that you are persistent. Even Putin is not that confident about his economy.

 

[Singh]

@asianobserve, Subsidy is over for petrol and diesel.

LPG they are trying to reduce, but Kerosene they will not be able to touch. It is politically too hot for the Govt. to tinker. At best we might see a marginal price hike on Kerosene.

Sir,

There was never ever any real susbidy for Petrol and Diesel.

As an example if I tax you 100% and then give you a 10% subsidy.

=====

 

[sob]

@Singh completely agree with you.I have been writing about this for quite some time now. Biggest hoax on the people.

 

[sgarg]

Got to admit that you are persistent. Even Putin is not that confident about his economy.

Did Putin say so? Any links??

 

[LETHALFORCE]