Fall of Oil-Only Fear Can Make us Slip

There was great noise regarding environmental pollution and we were made to think that our earth is going to die unless we reduce our excessive consumption pattern. Parallel ly there were growing concern regarding whether we had reached “Peak oil” and whether looming oil shortage would distort the rhythm of our life at earth.  To counter these fears…Sun and Wind came to our rescue…USA started the fight with Shale boom…efficiency of our vehicles were improved…we were making serious dedicated efforts to reduce our carbon emissions by being more responsible in energy consumption.  These were just the steps that should have been put forward and we did just that and these were actually working to the very best of our luck.

The most important factor responsible for driving the growth of material economy is the intangible one and that is…confidence, confidence of producers and Consumers that things will be under control. It is this confidence that will prompt producers to make investments for new productions and consumers to spend. At macro level, it becomes a Chicken-Egg riddle where consumer will be able to spend only if they have money and income due to rising employment levels prompted by new investments by producers and producers will invest when they are optimistic about consumer demand. And this is where this economic growth equation becomes very complex…everybody has his own version of economic theory. Some puts weight on making efforts to increase the consumption levels by giving incentives to consumers like cheap money and credit (Quantitative easing by US Fed)  thus raising production and employment but it backfires when consumption rise beyond optimal levels and future consumption is dragged into present…and any minor shock or fear ( Like Housing sector in USA, which fell like a pack of cards out of fear) can create ripple effects by pulling economy quickly down when people stop excessive consumption and demise of one particular sector spreads to other sectors of economy.

And some vote for Governments to tax the enablers of the economy to the brink and distribute the same to laggards so as to raise the demand. Some brilliant Governments plan to build Pyramids which they think will provide employment, create demand for cement and steel but these type of brilliant plans will only raise inflation levels as we witnessed here in india as Government can better use the resources to build warehouses to reduce agriculture wastage and this not only provides employment but also raises production (by reducing wastage).

Recession always is a phenomenon of misallocation of resources and basically a stage where economic forces correct that misallocation by directing the flow of investments to sectors which were undercapitalized and more fundamental.

Oil prices have fallen below $60 and this should have been welcomed at least by consuming economies but again we are being made to fear that falling oil is an indicator of falling demand due to slowdown in the global economies. First oil is not falling due to slowing down of global economies…it is the result of whole gamut of forces from shale oil, renewable energy growth, fuel efficient vehicles to political and economic forces fighting for market share.

OPEC has decided to not to cut the production to maintain its market share and is ready for more decline in oil prices as this would mean death knell for USA Shale Gas explorers as their cost of production is around $ 70-75 and many deep oil field around the globe can’t maintain their production at such a low prices. So shutting down of them will again raise the prices for OPEC. This may be a smart move but global energy sector is now much more complex as energy now covers more comprehensive resources like Solar, wind, Bio etc. solar can still compete with Oil even at $60 as we can plan input costs (which are bare minimum as Graceful Sun is free) with greatest surety and enter into long term contracts as there is mandate all over the globe to reduce carbon footprints.

USA can, at a certain level, in order to save its shale sector put sanctions on oil import by controlling the quantity of oil import or by levying import duties. Also this fall in oil prices may be a ploy to sideline Russia (oil exports are major revenue source of Russia) and ISIS.

Renewable sources are going to further dent the might of conventional fossil fuels with the advent of more powerful and cheap batteries. Huge research is underway on batteries which is going to change the game for Sun and wind.

Era of high oil prices were mainly due to misalignment of production resources in few hands and that balance is now going to settle in more equitable way. It is true that some of big investment plans for oil sector will now be shelved but that is very natural and that money will now flow into more productive use may be into Water preservation or batteries.

If Governments pass on the fall in oil prices to consumers then that will save much of their money and will leave them with more money…which is more consumption power or more savings. Unlike Indian Government which used the opportunity in raising the excise duty and thus aggregated around 10000 cr to make up for huge budgeted deficit. But at least we hope that they won’t use this money for building Pyramids.

So I don’t see any negative in this fall in oil prices unless fear grapples us and we plan to stop buying that beautiful Rose for our wives from that little girl at the corner of our street.