Source : FT
Monday, February 28, 2011
Oil and Demand Destruction
The ratio of Oil prices to World GDP has reached to a record level. Its a classic case of demand destruction where these high prices would end up hurting economies and killing the price surge. Moreover High prices would also make the oil producing countries to produce extra and glut would again destroy the prices. But right now its difficult to guess when and how...
Source : FT
Source : FT
Sunday, February 27, 2011
Crude Oil overbought
it seems revolution has a cost and this time its $ 120 / barrel. But will we sustain this massive rally in oil prices. technically, if WTI remains above $ 93 , the rally is here to stay but we r still not sure of when and how much. Another view is from Bespoke investment who comes comes out with a very interesting piece of data which suggests that oil seems overbought and it might spike further right now.
"the price of oil closed more than three standard deviations above its 50-day moving average on Wednesday. This is a feat that hasn't been accomplished in more than ten years, and going back to 1983, it has only occurred in eight other periods. In the table below, we highlight the first day in each period where this occurred as well as the commodity's performance over the next week and month. In more than half of the prior periods, crude continued to rise, averaging gains of 1.07% over the next week and 4.03% over the next month"
Source - BespokeInvestement
"the price of oil closed more than three standard deviations above its 50-day moving average on Wednesday. This is a feat that hasn't been accomplished in more than ten years, and going back to 1983, it has only occurred in eight other periods. In the table below, we highlight the first day in each period where this occurred as well as the commodity's performance over the next week and month. In more than half of the prior periods, crude continued to rise, averaging gains of 1.07% over the next week and 4.03% over the next month"
Source - BespokeInvestement
Wednesday, February 23, 2011
Oil at $ 200 - Nomura
So economists have started crystal ball gazing and predicting. last time it was Goldman Sachs who made a self fulfilling prophecy and this time around its Nomura.
read the full report
Nomura MENA
" If the situation in the region were to worsen in a way that it encompasses other oil producing countries as well in the future, the oil supply-demand balance could change very rapidly. In particular, if the crisis were to spread to Saudi Arabia, (possibility of which is quite low at present according to our Senior Political Analyst Alastair Newton), there can be real threat to global oil production, the impact of which is impossible to ascertain on prices. In addition, the recovery in Middle East oil production would depend upon the extent of damage to oil infrastructure during the crisis and the extent of restoration of stability. Overall, we do not rule out the possibility of oil prices touching record highs in excess of US$200/bbl in the near term, should the MENA crisis continue to spread over the coming weeks " .
read the full report
Nomura MENA
Monday, February 7, 2011
Education Vs Unemployment
So my parents were right when they forced me to study hard. The graphic shows the level of unemplyemnt vis a vis their education in USA
Thursday, February 3, 2011
Eqypt and oil price
The crisis in egypt is making oil shooting through the roof. The vents in Egypt will not only decide the fate of the nation but also the middle east which is the main supplier of the oil
WSJ 's take
The turmoil in Egypt is reverberating around the world, battering stock markets, driving up oil prices and raising questions about whether the rising cost of crude could slow the global economy.
The Egyptian stock market is expected to be closed Monday, after shares fell 17% late last week. Most Persian Gulf markets fell Sunday, with Dubai tumbling 4.3% and Oman 3%. The Saudi Arabian stock market ended up 2.5% after sliding 6% on Saturday. Prices for U.S. benchmark crude futures leapt $3.70, or more than 4%, to $89.34 a barrel on Friday. In Asian trading early Monday, U.S. oil futures were trading up 87 cents, or 1%, at $90.21 a barrel.
J.P. Morgan economists estimate that a 10% increase in oil prices, if sustained, would slow global GDP growth by a quarter-percentage point. They expect global output to rise at a 3.6% annual rate this quarter.
"The principal concern is that civil unrest spreads to Middle Eastern and North African oil producers, producing significant reverberations in financial asset prices and confidence," J.P. Morgan said in a research note.
For the U.S., the surge in oil prices comes just as the economy appears to be growing at a pace, which, if sustained, could bring down unemployment in the months ahead. Several European economies are growing more slowly or even contracting due to the continuing effects of the financial crisis.
About a million barrels a day of crude and refined products are shipped northward on the Suez Canal, according to the U.S. Department of Energy. A separate pipeline across Egypt carries 1.1 million barrels a day between the Red Sea and the Mediterranean. Together, that is roughly 2% of global oil production.
Closing the Suez Canal would force ships to seek other routes, adding about 10 days to the time it takes for Mideast oil to reach the U.S. and 18 days for the trip to Northern Europe. That alone would push up crude prices even if supplies were adequate due to emergency reserves around the world.
Read More
http://online.wsj.com/article/SB10001424052748704832704576113822189671908.html?mod=googlenews_wsj
Wednesday, February 2, 2011
10 myth about economic policies in india
Economic policy in India, and perhaps in other countries, is constrained by powerful prevailing myths and prejudices. Sometimes these myths simply reflect lazy thinking or an apparent immunity to facts. Sometimes they are shored up by strong vested interests. Sometimes all three. Whatever the reason it is hard to dispute the potency of myths in economic policy making. Here are my 10 favourites, some old, some new.
1. Higher minimum support prices for food grains are good for farmers. Not so. Yes, they are good for a powerful minority of farmers who have sizable marketable surpluses and ready access to government procurement programmes. But the majority of Indian farmers (especially poorer marginal farmers) are hurt by higher food prices for the simple reason that they are net buyers of food grains. And when you add in tens of millions of landless labour, it is quite clear that inexorably higher MSPs for wheat and rice are often quite damaging for rural households.
2. The move to a Goods and Services Tax will reduce the burden of taxation. I hope not! Or the already enormous fiscal deficit will soar higher. The more thoughtful government pronouncements do speak of a reform which is revenue-neutral or even revenue-enhancing. But there are many who tout the illusory prospect of a lower tax burden. The underlying logic of this reform is not tax relief but rather relief from distorted economic incentives and avoidable hassles and uncertainties, which are embedded in the current system of multiple indirect taxes.
3. There is no role for monetary policy when inflation is driven by supply shortfalls. Not quite. The truth is that the extent and duration of an inflationary bout triggered by a supply shock (such as a drought) does depend on the degree of accommodation offered by monetary policy. If liquidity is excessive, the inflationary consequences will be greater; if liquidity is tighter, price increases will be less. Of course, the act of tightening monetary policy can reduce output expansion. Hence the short term trade-off between inflation and growth is a live issue even when the initial shock is from the supply side. And then there is the problem of expectations: if monetary policy stands pat in the face of supply-induced inflation, then inflationary expectations can fuel the fire.
4. Our labour laws protect labour. Quite the opposite. Present laws over-protect a tiny minority (about 5 per cent of India’s 450m plus labour force, not counting government employees) at the expense of the vast majority of workers. By making it extremely difficult to retrench workers in the organised sector our existing laws massively discourage the employment of new workers in organized enterprises. In effect, these laws are very anti-employment and lead to huge under utilisation and “casualisation”of our most abundant resource, low-skill labour.
5. The exchange rate only matters to exporters. This is a common misperception, even among trained economists. Actually, the exchange rate is the single most important price in the economy, which powerfully influences the relative profitability of all tradable goods and services versus non-tradables (like haircuts in Delhi or restaurant meals in Mumbai). Thus, an appreciation of the rupee (versus foreign currencies) not only makes exports less profitable but also hurts an even greater range of import substitutes, that is goods and services produced for our home market in competition with imports from abroad.
6. Reducing fiscal deficits hurts growth. In the present “fiscally stimulated” environment there is much anxiety that a reduction in the current record high fiscal deficits (over 10 per cent of gross domestic product) will hurt growth. The massive deficits of 2008/9 and 2009/10 were perhaps justifiable in the face of contractionary effects of the global crisis. But these deficits are neither sustainable nor desirable. Actually, the Indian economy has grown fastest during periods when deficits were being reduced (1992-1997 and 2003-2008) and slower when deficits were expanding (1997-2002). This is because less government borrowing usually facilitates more productive private investment.
7. Subsidies on food, fuel and electricity help mainly the poor. Not so. The food subsidy mainly helps better off farmers and consumers in only four or five states where the public distribution system has effective coverage. The great majority of India’s poor do not have effective access to subsidized food grains. Many studies have shown that the huge subsidies on petrol, diesel, LPG cylinders and kerosene mainly accrue to better-off urban households (all those fuel-guzzling cars and SUVs). The large state government subsidies on electricity for agriculture have helped to thoroughly undermine the development of a viable electricity distribution network and kept our villages in darkness. In contrast, note how the rapid spread of mobile telephony did not need subsidies.
8. Foreign capital inflows are always good for our economy. Twenty years ago most Indians believed the opposite, that all private foreign capital inflows were bad and somehow designed to impoverish us. In the last two decades the conventional “wisdom” has swung to the opposite extreme. In fact, as both the Asian crisis of 1997-8 and the Global Financial Crisis of 2008-9 has amply demonstrated, foreign capital inflows into a developing country can be a mixed blessing. Specifically, for India, the capital inflow surge of 2005-8 posed serious problems of an overly appreciated exchange rate, excess domestic liquidity and an asset price boom. The more thoughtful of our policy-makers, including then Reserve Bank governor Reddy, grasped the need for capital account management in such situations.
9. Private provision of infrastructure can effectively substitute for government. Private public partnerships are the ruling mantra of the day. Since government has failed badly in providing adequate power, roads, ports, water, sanitation and so forth, we must turn to PPPs for our deliverance. Or so runs the new myth. Of course, there is a big and useful part that the private sector can play in building up our infrastructure. But the experience from all over the world suggests that the government must continue to play the major role in this area. In particular, PPPs cannot substitute for effective governance in infrastructure provision. Indeed, there is a growing body of experience which suggests that the governance requirements of PPPs are pretty high, if we are not to fall prey to the rip-offs of crony capitalism.
10. The trader (or middle man) is at the root of many of our economic problems. This is one of our really hoary and hairy myths. Whenever the rate of inflation rises, governments blame rapacious traders and deploy regulations to control their stocking and other activities. The truth is traders are essential to the efficient functioning of an economy. Commerce is the lifeblood of economic activity. Of course, individual traders exploit whatever monopoly power circumstances grant them to maximize their profits. But the problem does not lie with traders. It rests with the circumstances and policies which nurture national or local monopolies and oligopolies. The best antidote to monopolistic exploitation is competition. And that is best nurtured through better connectivity (transport and communication) and reduction of regulations and levies which fragment markets and raise barriers to competition, whether from abroad or at home.
Unfortunately, myths have of a life of their own.
Shankar aiyar
1. Higher minimum support prices for food grains are good for farmers. Not so. Yes, they are good for a powerful minority of farmers who have sizable marketable surpluses and ready access to government procurement programmes. But the majority of Indian farmers (especially poorer marginal farmers) are hurt by higher food prices for the simple reason that they are net buyers of food grains. And when you add in tens of millions of landless labour, it is quite clear that inexorably higher MSPs for wheat and rice are often quite damaging for rural households.
2. The move to a Goods and Services Tax will reduce the burden of taxation. I hope not! Or the already enormous fiscal deficit will soar higher. The more thoughtful government pronouncements do speak of a reform which is revenue-neutral or even revenue-enhancing. But there are many who tout the illusory prospect of a lower tax burden. The underlying logic of this reform is not tax relief but rather relief from distorted economic incentives and avoidable hassles and uncertainties, which are embedded in the current system of multiple indirect taxes.
3. There is no role for monetary policy when inflation is driven by supply shortfalls. Not quite. The truth is that the extent and duration of an inflationary bout triggered by a supply shock (such as a drought) does depend on the degree of accommodation offered by monetary policy. If liquidity is excessive, the inflationary consequences will be greater; if liquidity is tighter, price increases will be less. Of course, the act of tightening monetary policy can reduce output expansion. Hence the short term trade-off between inflation and growth is a live issue even when the initial shock is from the supply side. And then there is the problem of expectations: if monetary policy stands pat in the face of supply-induced inflation, then inflationary expectations can fuel the fire.
4. Our labour laws protect labour. Quite the opposite. Present laws over-protect a tiny minority (about 5 per cent of India’s 450m plus labour force, not counting government employees) at the expense of the vast majority of workers. By making it extremely difficult to retrench workers in the organised sector our existing laws massively discourage the employment of new workers in organized enterprises. In effect, these laws are very anti-employment and lead to huge under utilisation and “casualisation”of our most abundant resource, low-skill labour.
5. The exchange rate only matters to exporters. This is a common misperception, even among trained economists. Actually, the exchange rate is the single most important price in the economy, which powerfully influences the relative profitability of all tradable goods and services versus non-tradables (like haircuts in Delhi or restaurant meals in Mumbai). Thus, an appreciation of the rupee (versus foreign currencies) not only makes exports less profitable but also hurts an even greater range of import substitutes, that is goods and services produced for our home market in competition with imports from abroad.
6. Reducing fiscal deficits hurts growth. In the present “fiscally stimulated” environment there is much anxiety that a reduction in the current record high fiscal deficits (over 10 per cent of gross domestic product) will hurt growth. The massive deficits of 2008/9 and 2009/10 were perhaps justifiable in the face of contractionary effects of the global crisis. But these deficits are neither sustainable nor desirable. Actually, the Indian economy has grown fastest during periods when deficits were being reduced (1992-1997 and 2003-2008) and slower when deficits were expanding (1997-2002). This is because less government borrowing usually facilitates more productive private investment.
7. Subsidies on food, fuel and electricity help mainly the poor. Not so. The food subsidy mainly helps better off farmers and consumers in only four or five states where the public distribution system has effective coverage. The great majority of India’s poor do not have effective access to subsidized food grains. Many studies have shown that the huge subsidies on petrol, diesel, LPG cylinders and kerosene mainly accrue to better-off urban households (all those fuel-guzzling cars and SUVs). The large state government subsidies on electricity for agriculture have helped to thoroughly undermine the development of a viable electricity distribution network and kept our villages in darkness. In contrast, note how the rapid spread of mobile telephony did not need subsidies.
8. Foreign capital inflows are always good for our economy. Twenty years ago most Indians believed the opposite, that all private foreign capital inflows were bad and somehow designed to impoverish us. In the last two decades the conventional “wisdom” has swung to the opposite extreme. In fact, as both the Asian crisis of 1997-8 and the Global Financial Crisis of 2008-9 has amply demonstrated, foreign capital inflows into a developing country can be a mixed blessing. Specifically, for India, the capital inflow surge of 2005-8 posed serious problems of an overly appreciated exchange rate, excess domestic liquidity and an asset price boom. The more thoughtful of our policy-makers, including then Reserve Bank governor Reddy, grasped the need for capital account management in such situations.
9. Private provision of infrastructure can effectively substitute for government. Private public partnerships are the ruling mantra of the day. Since government has failed badly in providing adequate power, roads, ports, water, sanitation and so forth, we must turn to PPPs for our deliverance. Or so runs the new myth. Of course, there is a big and useful part that the private sector can play in building up our infrastructure. But the experience from all over the world suggests that the government must continue to play the major role in this area. In particular, PPPs cannot substitute for effective governance in infrastructure provision. Indeed, there is a growing body of experience which suggests that the governance requirements of PPPs are pretty high, if we are not to fall prey to the rip-offs of crony capitalism.
10. The trader (or middle man) is at the root of many of our economic problems. This is one of our really hoary and hairy myths. Whenever the rate of inflation rises, governments blame rapacious traders and deploy regulations to control their stocking and other activities. The truth is traders are essential to the efficient functioning of an economy. Commerce is the lifeblood of economic activity. Of course, individual traders exploit whatever monopoly power circumstances grant them to maximize their profits. But the problem does not lie with traders. It rests with the circumstances and policies which nurture national or local monopolies and oligopolies. The best antidote to monopolistic exploitation is competition. And that is best nurtured through better connectivity (transport and communication) and reduction of regulations and levies which fragment markets and raise barriers to competition, whether from abroad or at home.
Unfortunately, myths have of a life of their own.
Shankar aiyar
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