Monday 15 December 2014

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.

5 comments:

  1. Hello,
    I have questions about SKM eggs.
    (1) USA is going to phase out battery cages which will increase egg price by around 25% there. Will it benefit SKM?

    (2) It is too much raw material sensitive business. In annual report they wrote about steps taken to decrease effect of egg price fluctuations. Which, if you are aware of any? Is SKM able to pass raw material cost to customers easily?

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    Replies
    1. Dear Sir,

      It won't be easy for USA to phase out battery eggs as there will be huge opposition from egg producers...even if they do, they won't allow any exports into their country of battery eggs as the same will defeat the very purpose of the phasing out. California has made the law to ban any battery eggs from jan-2015 in the state...while some other states have filed the petition against the same...but the same has been defeated in the court as there is a strong movement in USA to improve the working conditions for animals...but whether consumer will agree to pay the high prices is a question which only time will answer...but i don't see any benefit for SKM egg in this regard as it also will have to follow the same rules.

      Regarding raw material fluctuations...this is the thing with which every producer has to live with. even our great TATA Tea is impacted by volatile tea prices. The only way to defeat it is to develop own raw material sources by backward integration much like TATA Coffee which produces coffee in its own plantations and can use the same for its branded coffee products like Mr Bean in india and eight o clock coffee in USA.

      SKM egg is having a small captive poultry farm to produce high quality eggs for almost 25% of its requirement...balance are acquired under contract farming. So i think SKM will definitely look forward to enhance this capacity once its financial improves with better market conditions in export markets. Growing demand in indian market will be a huge opportunity for SKM.
      In export market SKM egg won't be able to raise prices easily due to stiff competition but it can do the same in india as their is less competition due to very stiff quality control requirements. As the fast food industry and MNC fast food chain are growing big in india...we should't be surprised if indian market becomes the one of the biggest market for SKM...just visit any Mcdonald and you can see the same...liquid eggs are everywhere in fast food industry.

      Regards,

      Gurpreet Singh.

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  2. Dear sir, thanks for reply.

    (1) even I thought about animal activist in India fighting against battery cages will one day win and SKM will have to change methods... Like colony cages ( 750-800 sqcm/hen) while battery cages have only 550sqcm. But I am not worried at all as ... It will take time...and by that time skm will be debt free and with good cash and 35 acre plot... They will manage everything. (Google satellite map of plant shows hefty extra land). Agricultural land erode around 13lakh/2500sqmt... So skm will not face any problem.

    (2) Annual report suggests they have increased live bird stock substantially. If chickens, soon they will mature.

    (3) whenever I see http://www.expatistan.com/price/eggs/tokyo/INR ( you can check egg prices for other cities like Berlin etc too).... I can't understand why is SKM not demanding much????

    (4) I firmly believe in future of SKM and liquid egg will really print money for them.

    I have messaged you on a social media site too.
    Anyways thank you for sharing your views.

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  3. And sir I was not talking about skm's opportunities in USA, but was thinking that USA's steps would give SKM more competitive advantage in japan and Europe..... At least till India mandate something.

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  4. Dear Sir,
    Countries having fewer mineral and oil deposits have a much higher GDP as compared to our country. India is blessed with mineral, oil and natural gas deposits as well as great possibilities to explore the conventional resources. Then what causes us to remain a middle income economy? How much is the inverse proportion of employment in various sectors and their contribution to GDP responsible?

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