The Stone Age Did Not End For A Lack Of Stones
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)
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 let alone
every other country, 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 spot. It is already quoted
in other futures contracts at over $20 a barrel.
But neither will oil
soar into a three digit pricing again. Not unless, demand outstrips the
considerable supply. But what would that take? America, once a buyer of 50% of
the worlds 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
erstwhile 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 Asia 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 include its potential to act as a buffer to a predatory China, and the personal vision of its 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 world-wide 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 compensation 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 fiscal 2021, after the
severe crunch in 2020.
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 God-send, 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.
For: Sirfnews
(1,513 words)
April 21st , 2020
Gautam Mukherjee
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