Thought for the day
”Better a diamond with a flaw than a pebble without."
-
Confucius (Chinese,551-479BC)
Word for the day
Mythomane (n)
A person with a strong or irresistible propensity for
fantasizing, lying, or exaggerating.
(Source:
Dictionary.com)
Teaser for the day
Should Congress sack A. K. Anthony for misguiding the party
on reasons for loss in 2014 general elections?
Cheaper food prices do not cure sick metabolism
The conspiracy theories on falling oil prices are stretching it too
far, in my view. I guess, most theories ignore that materially lower prices
could cause more harm to the global economy than the higher prices.
It is pertinent to note that the breakeven price for North
America shale gas, which is popularly believed to be the primary reason behind
fall in global crude prices, is much higher. Since 2007 the fiscal breakeven
for crude oil has also risen materially for most producers.
As per some estimates,
"If crude prices stay low for long, almost all the major oil producers
will have to start dipping into their foreign reserves to fund their welfare
states and military apparatus. The "fiscal break-even" price needed
to cover the budget is $130 for Iran, $115 for Algeria and Bahrain, $105 for
Iraq, Russia, and Nigeria, and almost $100 even for Abu Dhabi. The Saudis
themselves are probably well above $90 by now.
This means that they will have to sell holdings of foreign
bonds, assets, and gold to plug the gap. Russia has run through $7bn in recent
days defending the Rouble. The scale of this could be huge, and it comes at a
time when China has stopped accumulating reserves for its own reasons, taking
away the biggest global source of fresh purchases."
Therefore, saying that Saudis are targeting a lower price to
squeeze enemies like Iran, Russia, and the Caliphate does not make much sense
to me.
I believe it is more of a function of economic and financial
factors.
On economic side we have seen decline in consumption growth
while supply has grown consistently. China could be a prominent factor in
slower consumption demand, as the debt fueled economic growth has a taken a
breather and outlook appears subdued at best. But it would interesting to
evaluate the collective contribution of factors like (a) demography especially
in Europe and Japan; (b) fiscal correction in Europe, US and many emerging
markets like India leading to lower government spending, lower subsidies, and
higher taxation; (c) better energy efficiency; (d) substitution effect due to
higher use of renewable; (d) Fissure in OPEC cartel as Iraq and Libya produce
more to finance reconstruction work, Iran produces more and sell cheap to fight
global sanctions, and non OPEC swing producers Russia and USA also produce more
and consume less.
In most of these cases, the lower prices may not stimulate more
consumption and hence push the demand supply equilibrium to lower levels. The
lower revenue for producing countries and financial stress on producers in
North Americas who have borrowed heavily to produce relatively expensive shale
gas, could cause seriously damage the global financial stability, which in any
case is heavily predicated on the persistently loose monetary policy.
Moreover, a weaker fiscal ability of producers to pursue welfare
and development agenda, could refuel the simmering civil unrest and strengthens
non-state disruptive elements.
To conclude, in my view, lower commodity prices due to lower
demand is seldom good for the economy. It is like poor appetite due to sick
metabolism, which structurally weakens the body. Lower prices either due to
more supply or higher productivity is what we should desire.
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