Thursday, June 26, 2008

Inflation and Oil Price

This inflation crisis is ambiguous to understand for the ordinary person. It’s disgraceful to say some of highly educated but shameful politicians are blaming the present government to get some political advantage from it. I guess many of political leaders themselves are not aware of the global crisis but they always talk about it with out proper idea about the global crisis. We should accept the fact which was the side-effect of our economy growth. The blame should also go to media. Media completely failed to educate people about the global crisis. The worst scenario is media targeting the government. Media is opening mouth along with political leaders in criticizing some one for the inflation.

Oil Price in India

Well now the price of crude oil is above $140 a barrel and when the price has moved more than 50$ a barrel, the increase of price in India has been just Rs 5 a liter for petrol. To me as a tax payer, I will always welcome the price of petrol which is not to be too far from market determined price. Around 10% of us are tax payers and the money we give to government will be used to subsidies the petroleum products for rest of 90% also. Now to meet deficit, government will either increase taxes or will compromise with infrastructure and other some basic facilities enhancement. Both of these ideas won’t be liked by a tax payer.
Solution somewhere lies in differential pricing of petrol and diesel. Like we can fix some quota of petrol for a every individual (depending on his vehicle registered) per month at some present subsidized price and then there after at market price for usage more than limit. This will also reduce people going for personalized vehicle so it will ensure smooth traffic even in city like Bangalore. Pricing should also take care of difference in diesel price used in mass transport and diesel price for personalized individual usage. But this move will have to be well supported with good public transport system with different classes. Such model of differential petroleum price is already there in some countries and if it could be implemented with any loophole possibility, then the much subsidy burden on government will be taken care of….

Inflation in India
Let’s just look at two facts first:
1. Wholesale price inflation rose by above 11% in the 12 months to June. The inflation rate is now at its highest since 1995.
2. Inflation Internals: Food articles - down 1.1% and non-food articles - up 1.4%. In fuel: diesel - up 21%, petrol - up 11% and LPG - up 20%.
As per Economists the inflation rates will continue in double digit in some time to come .Why??
If we just look at world inflation China’s inflation rate is over 8%.The Philippines reports inflation of nearly 10%.Inflation is soaring in Vietnam, Malaysia, Russia, Pakistan, Bangladesh, Nigeria, Egypt… .Europe’s reported inflation is now the highest in 20 years. Even Japan is now reporting inflation, its rate having nearly doubled over the last year. The U.S. is wrestling with the worst food inflation in 17 years ... Now lets look it from Oil prices view

Oil price as factor of Inflation:
As oil prices move up or down, inflation follows in the same direction and the impact will be greatest when a country is (a) a large-scale importer of oil and (b) has many industries that use oil as an essential input in the production process through its cascading effect
Higher energy costs are a major factor in the worldwide explosion of food prices. The increased cost of fertilizers, packaging and transport has worked through to the markets and shops. At the same time, the diversion of agricultural production to bio-fuels (mainly in response to the high cost of oil) has been a factor in reducing the supply of basic foods like cereals and cooking oil, pushing up their prices. Now why fuel prices are rising then?? Well it is because of many reasons
As a broad trend over recent years, oil prices have been pushed up by supply and demand factors. US war on Iraq and strong growth of the world economy after 2003 (averaging 5% a year) and even higher growth in China and India (over 10% a year) undoubtedly created exceptional demand for oil. But then the main reasons for sudden increase are different....
With the fall in interest rates big investors like hedge funds, investment banks and pension funds have turned to the commodity markets in search of higher returns. While low interest rates have reduced the return from some other financial assets, the rise in crude oil and other commodity prices offer the prospect of big gains from commodity futures. Speculators, on the other hand, treat commodities as a financial asset. Experts believe the current high oil prices are inflated by as much as 100% and it is creating a dangerous bubble in oil and other commodity markets. Speculations like US or Israel attack on Iran has further fire the speculation.

Inflation Solution
The best is that India should look for alternatives and should follow the model of countries like Japan .Companies like Toyota and Mazda have come up with the concept of hybrid cars combining internal combustion engine with batteries and hydrogen cells. These cars recently introduced in India includes taxes of over 100% which should be rather subsidized to encourage people to go for it .
The Central Bank should stop artificially maintaining the rupee at a certain level. Let the rupee have a free float. It is likely to appreciate (by as much as 10%) in a few months. A stronger rupee would mean cheaper imports. Unfortunately, it would also mean fewer earnings for exports. The export lobby has enjoyed the benefits of a weak rupee long enough. Perhaps it is time for some payback. Even in services Indian contact centers offer services at one of the lowest in world .Let Indian business find other dimensions of competitiveness.
• There is an urgent and crying need to improve agricultural productivity and ensure a fair price to the farmer through disintermediation. Our agricultural productivity is just about 50% of China’s. It’s the time for second and bigger Green Revolution.
The civil nuclear cooperation deal between the India and the US is as good as dead. The government dare not risk the prospect of having to face an early election by pushing the deal through. Postponing it by a year automatically means having to deal with a new US administration that may not be as enthusiastic as the present one to see the deal becoming operational.
This century will be ruled by one who will have constant energy source with it. It’s high time to think or we will lag behind in this race.


Amlan Nanda said...

4 reasons for oil price rises (in descending order of relevance by my opinion):

1. Speculative Markets: Big I-Bankers are in bed with oil cartels to put big money on future options trading. Its just like making a bet on a future event(US investment banks do that) and having the power to set the prices (oil producing nations do that).

My finance professors deny it(ofcourse!), but think about it- there is no way noone knows why there is such a meteroic rise. its only when people are doing a very good job of hiding it. Noone can hide it anything about oil from US gov, unless US gov is itself the perpetrator.

Reason is simple: The world has too much dollar now as foriegn exchange, in short US owes a lot of money to the world. To maintain the health of its economy, its vital that countries like india and china and others are stripped of their burgeoning foreign exchange. Best way to do it is by over charging them for oils. The sheikhs in UAE get all the dollars, but that brazen country has no scope to do anything with them, so they route it back to US.

2. Peak Oil- Discovery of oil fields have stopped since the last few decades and there is a feeling that the we have hit the optimum point of oil discovery. That puts a limit on oil we have left and sets up panic buying.

3. Growing demands from India and China- ofcourse true, but supply-demand is still in balance.

4. Falling dollar: Dollar is falling in value against all major currencies . Most nations have piled up huge amount of it and are sitting over a stack of bills whose value is depreciating.
And they see an option of getting rid of it and buying something more valuable- Oil!.. they simply go for it.

PS: Oh wait, the comment is so long i should write a blog about it =)

Arpan Uber Chaudhry said...

Nice view to support my posts amlan but i guess u can well write a blog entry on it.....
I see a major down in oil prices in a year to come...
Demand from asia and bric will come down once govt from these countries will float things at market prices and people will start looking at alternatives like its case in US and europe .and once demand will come down .this price bubble will burst a big time.....