Happy –go –lucky times for oil companies

Kabhi khushi, kabhi gam….do not worry I am not changing my blog name- well this quote is for Indian oil companies who faced lot of gam and now its time for them to have some khushi.

In the present era new synonyms that are continuing to be associated with high oil prices are, global turmoil, high inflation, crashing stock markets, rising food prices, weakening of dollar and many more. Few days back prices of oil have reported a hike of $ 139 a barrel and according to estimations can reach $ 150 by July because of ever increasing demand and political tautness.
However now we witness a change in the trend- in September 2008 oil prices are near $ 109 a barrel due to falling demand from major oil consuming countries against hurricane threats to the US oil sector. This fall in oil prices has shown a sign of relief for India Inc, in times when India is suffering from lot of macroeconomic instability.

Let me here try to explain this whole phenomenon of rise in crude oil prices:
Crude oil is regarded as an element that is required for all commercial and residential purposes. In order to ensure that we have enough crude oil for our needs certain amount of money is paid to the countries from which oil is imported. These companies have a set crude oil price. The unit in which crude prices are measured is based on barrel production amount. The companies from which oil is imported can only drill certain amount of oil from drilling fields, due to this the most famous law of demand comes in to play i.e. lower the production , higher will be the price of oil. Oil prices are defined in dollars for most of the oil exporters. There is a vicious cycle of higher oil prices which leads to higher trade deficits, which in turn leads to weakening of dollar and again leading to higher oil prices. In order to explain this phenomenon lets start with rising oil prices. Suppose in the initial years rise in price of oil can be attributed to the following factors:
· Increase in demand for oil from emerging economies like China and India.
· Supply breakdown from Iraq, Nigeria, Venezuela, Russia and US Gulf coast.
· A terrorism / war premium
· Buying by traders speculating that oil prices would rise.
Now since US imports oil, now with the advent of rise in oil prices, trade deficit of US – the difference between the cost of imports and export, will increase. This is where the vicious cycle comes in; every dollar increase in the price of a barrel of imported oil increases the size of the U.S trade deficit. This is due to the fact that oil is priced in dollars in global market. Now this increased trade deficit will put pressure on the dollar which will make it weaker further, this in turn makes OPEC countries to raise dollar – denominated price of barrel of oil to make up for the dollars fall and so on.
So this is the story of rising oil prices. Now since oil is pegged in dollars, India was badly hit by rise in its prices.

Now due to slowing of demand leading to fall in prices of oil has started showing some positive sentiments on Indian stock exchange. Another relief comes in for central banks as easing of pressures on hike of interest rates. According to finance ministry we may soon witness single digit inflation numbers, which is the essential need of the hour.
Moreover if oil comes below $100 a barrel on a consistent basis, the fisc should easily self-correct by over 1% of GDP. With macro indicators improving, the next challenge will be to ensure that growth does not fall below 7.5-8%.