OPEC vs SHALE : WHO WON THE BATTLE ?

Oil prices took a huge dive from over $130 a barrel in July 2014 to near $25 a barrel in February this year. And it is mainly due to Saudi Arabia continued to pump more and more oil to kick out high cost producers especially the Americans.

The Rise of OPEC : 

Post World War II , the oil market was dominated by a group of multinational companies better known as "The Seven Sisters" , most of them was headquartered in the US. To spur consumption those companies announced significant cuts in the oil prices unilaterally. As a result the economies of the oil producing countries deteriorated. In order to respond to the actions of the US based companies

the governments of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela formed the Organisation of Petroleum Exporting Countries or OPEC. Their mission was to coordinate oil policies and stabilize oil prices. But in 1973 the OPEC announced significant cut in oil production and announced "Oil Embargo" against USA , resulting a sharp rise in oil prices from $3/barrel to $12/barrel. Thus OPEC which produced more than half of the global oil was successful in driving the prices up and hurting the US economy.This event had far reaching effect on oil prices. Thus the balance of power was shifted to the countries comprising OPEC.

 

OPEC Looses the Upper Hand :

But the discovery of shale oil has helped America to produce record level of oil and reduce their dependency on OPEC.Abundant amount of oil and gas has been extracted from underground rocks by a method known as "Fracking". They were enjoying the high prices of oil and swimming in profits. The predictions of oil reaching $200 a barrel aroused more enthusiasm among them and they took bank loans to invest in shale oil fields.Further the Iran-US Nuclear deal and lifting of economic sanctions on Iran resulted in pumping more oil into the market, resulting a reduction of market share of OPEC counties and their influence.

Reply From OPEC: 

To gain market share and their lost glory OPEC had to force high cost drillers out of business. Their plan was simple : to pump huge amount of oil into the market. More the supply , less will be price and the lower the price of oil , the less profitable will it be for the US shale drillers. Now with continuing over-supply of oil the prices has reached $30 a barrel, US shale oil producers are facing imminent bankrupt as the loan they took during the boom period  became too costly to bear during the gloomy scenario. They were forced to cut production and their stock prices went for a toss.

                                        

The Bottom line :

As Iran refused to cut production as they want to gain market share after economic sanction on them was lifted the oil glut will continue and the low prices will remain. Saudi Arabia will not welcome this as prolonged low price will also hurt their economy and their motive to regain market share will fail. Russia , Nigeria  and Venezuela have to produce more oil at low prices as their economy majorly depends on revenue from exporting oil. So the competitive pressure on Saudi Arab will remain. Further the US shale drilling technology has improved a lot in the last decade and if the price reach $40 -$45 a barrel they will be profitable , a significant improvement from the past when they need at least $60 a barrel to  break even. 

Thus the global economies of oil have changed. Market will be less subjected to the whims of the Sheikhs. US shale industry will continue to be a major competitor to the Saudi Arabia. The major beneficiary of the low priced oil will be the consuming nations such as China and India. They will have extra money and those can be used for capital expenditure and that will boost their GDP. This effect is most pronounced for our country as the government will be able to boost exchequer by not only weaning off the oil and kerosene subsidy but also imposing excise duty on petrol and diesel prices. The inflation will be lower , consumer spending will increase and more discretionary spending power will have far reaching positive impact for our country,


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acharyagoutamkumar@gmail.com

            Railway Budget : Is It That Unnecessary ??

The Railway Budget is the usual way to get going the Budget carnival in our country. This year the Railway Budget was presented on 25 February and subsequently The Union Budget was presented 4 days later. Now the government is working to merge the former into the later as Railway minister Suresh Prabhu has already written letters to Finance Minister to scrap the grand old tradition of having a separate budget for Indian Railways. He argued that since other countries do not have a Railway Budget , our country also does not need one. Various intellects and bureaucrats also favoured for the same. Though according to me this matter needs more discussions and thinking . 

  
 I personally want The Railway Budget to be announced every year in line with the tradition . It is not that I want to hear all the populist measures taken by the respective Railway Ministers , nor I want to hear his/hers prolonged speech about initiatives to rejuvenate near bankrupt department. 

I want a Railway Budget so that the sorry state of the national behemoth does not get unnoticed. Yes, gone are those days when money allocated to Railway was more than 70% of the total budget,  as most of the spending went to build railway infrastructure in British era , still  railways has huge relevance to most of the people and to the business. For whatever Rail Budget is worth or not , it still directs attention the grim condition of  the public transporter. The annual scrutiny keeps the pressure on bureaucrats to show some growth and progress of railways comparing to the previous year. Thus if Railway Budget is merged with the Union Budget, all the inefficiencies , losses , deficits of railway will be get lost under the promises 8% GDP growth of economy and lofty words of investment and FII inflows and no one will bother about gloomy state of railways. Then the deficit of railways will continue to rise and government will have to one day bail out so called " to big to fail" department with tax payers money , probably by introducing " Save railway cess"

Do not brake the tradition sir...

 There may be numerous reasons to do away with The Railway Budget . Some benefits can always be found to justify the move. But that will be a big blow to the reform progress of the railway. The reform process of the behemoth is moving very slowly, but under Union budget the process may get stopped altogether. The railway should be spun off as a commercial entity . Apart from social welfare, there should be some motive for profit. The fare should be depoliticized . We must remember that railway is still dominant mode of public as well as freight transport. The former Maruti Suzuki MD Jagdish Khattar rightly said , "According to me Railway Budget is more important than this (Union) Budget. The fact is Railways is the lifeline of the entire industry and the country, I am not a great believer of Budget, if you look at the speeches of the previous Finance Ministers, the promises they made were concerned with other ministries and they never implemented them. So I think major changes have to take place to come from the ministers themselves to implement it,"  . At this crucial juncture of our economy we can not let Railway to go out of public notice, something that inefficient bureaucracy will welcome. 

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acharyagoutamkumar@gmail.com