 "Low crude oil prices: Multiple gains for India")
The markets for crude oil, gas and coal move in tandem. Crude oil has collapsed over the past 15 months and pulled down gas and coal with it. The fall in prices in late 2014 was astonishing. Crude oil was trading at $100 per barrel during July-August of 2014, it dropped to $50 in December and down to almost $40 in January 2015. Between February and November 2015, crude oil prices moved sideways. In December 2015, prices have dipped below $40 despite a small rally.
Part of the weakness is due to currency fluctuations. Crude oil is generally dollar-denominated and the dollar has strengthened. If the US Fed goes into a cycle of raising rates, the dollar will strengthen even more. But, there are also several other factors leading to cheaper crude oil.
Crude oil is a necessary good. If supply exceeds demand even slightly, prices can drop sharply, vice versa if demand exceeds supply slightly, prices can shoot up. The Organization of the Petroleum Exporting Countries (Opec) used to have a stranglehold on supply and manipulated production to keep prices high. That situation has changed.
A technological revolution has enabled producers in North America (and elsewhere) to tap unconventional sources like shale and tight oil. Shale production is more expensive and more environmentally damaging than conventional oil. But if Opec cuts supply and prices rise, shale enters the picture.
Also, Iran is potentially back in the game and it could push up supply if Opec decides to cut. In gas, too, new producers like Australia could change supply dynamics. The potential supply expansion puts a ceiling on prices.
Opec has chosen to keep supply up. This could perhaps drive some shale producers permanently out of the business if prices stay low for long enough. It also means that supply has exceeded demand for quite a while. In turn, this has meant that speculators have built up stocks of crude oil (mostly stored in tankers offshore) at low prices. This means that supply cuts will trigger a release of those stockpiles.
In addition, global growth remains weak. Hence, demand for energy is muted, and it looks like growth will stay weak through 2016. This means that crude oil prices could well stay down. In turn, gas prices will stay down, and so will coal.
In addition to fossil fuels, renewable prices also tend to move in tandem with crude oil. Demand for wind, solar, biomass, etc., drops when crude oil, gas and coal are cheap. This could actually start impeding the renewables sector, though there is strong political consensus for subsidising of renewables. Climate change fears are likely to ensure that activity continues but there will, very likely, be a slowdown even in the renewables sector.
The impact of cheap energy is generally positive for India which imports most of its crude oil, a lot of gas and some coal. The Current Account Deficit (CAD) has stayed within manageable proportions because of low energy prices, and a certain amount of reform (such as freeing up diesel prices) has been possible.
Transport industries such as the airlines and Indian Railways have revived due to lower energy costs.
The refining and marketing sector also remains a good play for the medium term. There could also be a burst of new activity in areas like city gas distribution, and in building LNG terminals and pipelines.
That danger lies in making assumptions that cheap energy will be available indefinitely. Businesses and governments making similar assumptions could lead to trouble because, at some stage, the global economy will recover and demand will rise. Or turmoil in West Aisa and Russia will impact supply. Or Opec will regain control of supply after driving shale operators out. But, so long as prices stay down, and assuming that the government doesn't make ill-judged decisions, India gets a windfall.
Part of the weakness is due to currency fluctuations. Crude oil is generally dollar-denominated and the dollar has strengthened. If the US Fed goes into a cycle of raising rates, the dollar will strengthen even more. But, there are also several other factors leading to cheaper crude oil.
Crude oil is a necessary good. If supply exceeds demand even slightly, prices can drop sharply, vice versa if demand exceeds supply slightly, prices can shoot up. The Organization of the Petroleum Exporting Countries (Opec) used to have a stranglehold on supply and manipulated production to keep prices high. That situation has changed.
A technological revolution has enabled producers in North America (and elsewhere) to tap unconventional sources like shale and tight oil. Shale production is more expensive and more environmentally damaging than conventional oil. But if Opec cuts supply and prices rise, shale enters the picture.
Also, Iran is potentially back in the game and it could push up supply if Opec decides to cut. In gas, too, new producers like Australia could change supply dynamics. The potential supply expansion puts a ceiling on prices.
Opec has chosen to keep supply up. This could perhaps drive some shale producers permanently out of the business if prices stay low for long enough. It also means that supply has exceeded demand for quite a while. In turn, this has meant that speculators have built up stocks of crude oil (mostly stored in tankers offshore) at low prices. This means that supply cuts will trigger a release of those stockpiles.
In addition, global growth remains weak. Hence, demand for energy is muted, and it looks like growth will stay weak through 2016. This means that crude oil prices could well stay down. In turn, gas prices will stay down, and so will coal.
In addition to fossil fuels, renewable prices also tend to move in tandem with crude oil. Demand for wind, solar, biomass, etc., drops when crude oil, gas and coal are cheap. This could actually start impeding the renewables sector, though there is strong political consensus for subsidising of renewables. Climate change fears are likely to ensure that activity continues but there will, very likely, be a slowdown even in the renewables sector.
The impact of cheap energy is generally positive for India which imports most of its crude oil, a lot of gas and some coal. The Current Account Deficit (CAD) has stayed within manageable proportions because of low energy prices, and a certain amount of reform (such as freeing up diesel prices) has been possible.
Transport industries such as the airlines and Indian Railways have revived due to lower energy costs.
The refining and marketing sector also remains a good play for the medium term. There could also be a burst of new activity in areas like city gas distribution, and in building LNG terminals and pipelines.
That danger lies in making assumptions that cheap energy will be available indefinitely. Businesses and governments making similar assumptions could lead to trouble because, at some stage, the global economy will recover and demand will rise. Or turmoil in West Aisa and Russia will impact supply. Or Opec will regain control of supply after driving shale operators out. But, so long as prices stay down, and assuming that the government doesn't make ill-judged decisions, India gets a windfall.
The author is a technical and equity analyst