Petrol price hike : How much to worry?

The Crude prices are a definite concern for India when they rise but when the rupee falls crude should not be blamed. The parity of currencies will adjust on a continuous basis and there is nothing that is special about it. However , when the crude prices jump in a manner outpacing all other commodities then we as a nation become disadvantaged.

The past ten-twelve years have been special years for India and also or the world at large. It was in this period that China and India progressed at faster pace than the rest in the world . These nations also happen to be oil importing nations. Naturally the pressure on oil prices was going to be there but it could be taken well in stride by these two nations because of there greater participation in world’s economic exchanges in a favorable way.

The western nations have been having problems with growth and did not contribute to demand surge in a significant way and that may have still kept the oil prices in check but to a small extent only . The crude sells for $110/bbl now as against about $25/bbl in 2001-02. This is no small jump but seen against the price of gold and silver, it is not much of a difference.

Since just before the 2008 crisis the price of crude is relatively cheap against gold because it had crossed $140/bbl then and dropped to $40/bbl later. Forgetting this extreme behavior and relating it to gold prices , post 2008 gold has gone up more in value. Post 2008 period is a new chapter in economic history of the world because every other nation resorted to printing currency/ expanding money supply and keeping interest rates under leash. This should have reflected on oil prices as also on gold prices and other assets too.

What I have tried to make out is that there is no situation calling for panic in respect of oil scene. However , we in India have become too upset by what is happening here. I may tell you this is something that has been invited by us or to be exact by our govt.

Let us look at some fact and figures. We have reliance on fossil fuels to the extent of 3/4th of energy consumption. Of this 3/4th , 40% is from coal and 30% from oil and gas. 80% of Oil and gas requirement is met through imports and it would rise to 90% over the next year or two. We have had to foot the import bill of $79.55 billion in 09-10 and $106 billion in10-11 which is equivalent to 1/3rd of total import bill. We import 70% oil from middle east where we may have scope to export and have remittances from Indians there.

We imported just 200 million barrels of oil in 90-91 , 600 million barrels in 2001-02 and now we import more than 1200 million barrels. This speaks of our ability to arrange required forex and still keep rupee value intact which has only eroded badly recently. No doubt we have been supported by IT sector in increasing dollar availability. There have been investment related inflow ( which i despise as it sells a part of India to outsiders). Then there has been greater manufacturing efficiency allowing us to export more. If only sound policies with a better legal framework had been put in place , our ability to compete would have been better.

We cry too much for oil price contributing towards inflation while oil is just responsible for 14% of the headline inflation. Since 2008 international crude oil prices have not gone up much but inflation has been far higher. So blaming crude for prices is wrong , it is not economizing on fuel consumption that is bad. This has happened due to keeping lop-sided subsidies on different products and not letting any direct relationship prevail in domestic prices and international prices. The subsidy element could have been kept as a proportion of the cost price at a reasonable level for petro products used by poorer sections of society and for agriculture but not in a irrationally fixed manner. The govt has all the liberty to move ahead in this direction but they have no real concern and this leads me to believe that some people draw wrongful advantage in the whole scheme of things in oil sector.

No doubt that our average per-capita oil consumption is 1/5th of world average. This is our strength and we should not lose this strength by solely making our social and material progress dependent on oil. I do agree that oil is a necessary input for faster growth , but here we should consciously decide to base our growth based on model where oil consumption growth rate is lower than overall rate of growth. This will make future oil shocks more manageable as the oil shocks will be routinely there. Oil prices do not move in a natural way , the big speculators and cartels have their hand in it. The oil interests, exploration, marketing, movement, pricing and availability are all without transparency.

In India petrol price has gone up from Rs 33/ltr in 2002 to Rs 78/ltr now and diesel price has gone up from Rs 23/ltr in 2002 to Rs 45/ltr now. So diesel is now cheaper (compared to petrol) by 42% against 32% since 2002 . Over last ten years every thing has become this much costlier. But oil sales have filled the govt coffers by a greater margin. it is another matter that they spend it more foolishly and without benefiting the masses.

We do not have to worry too much because the world consumption is going to grow by just 1% between now and 2035 according to some studies. The consumption will rise from 90 billion barrel/day to 110 billion barrel/day. Also while we import just $118 billion worth of oil as against $426 billion by USA, $500 billion by Eurozone, $250 billion by China and $190 billion by Japan. Its not that oil spike will hurt us only. Further our gold imports will always allow us to make adjustment in times of real crisis.

Another saving grace is that we distill all the crude ourselves for our requirement and have further capacity to export. This saves a lot in terms of costs. In the end I would say that as and when the govt will see the light of the day and opposition would be co-operative , oil related issues will be thing of past.

The petrol price hike

In a bold move that has come from Oil Marketing Companies and not exactly from the govt , the petrol prices have been raised by about 10% . It has come not without the govt’s tacit consent and has the govt has to be to ready for the criticism directed against them.

There is some dirty play is the natural conclusion that comes to mind when govt’s vice like grip on all aspects of petroleum is considered. In what way does the govt or anybody else looks at it not as just another commodity.

The petroleum consumption is most flexible of all commodities commonly consumed. It has a great elasticity of demand which can vary according to the price in market and is never a dying need. Where it is an important input and the public’s welfare is attached , it is as a fuel for the trucks but its impact on this sector happens to be more when shortages are there . When the pricing is free the market ensures that there are no shortages.

Further taxing it like no other commodity and then also impressing on people that its an item which has to be supplied to people only with subsidies , is an exercise mired in falsehood. The taxes and duties help the thieves and short deliverers , and the differential in prices is to prompt adulterators for benefiting out it. This can only be there because some powerful lobbies have an influence on govt and its people.

Then there are questions of long term contracts and quality of crude . Then there are fluctuating currency parities . The hedging for crude price, for freight and for exchange rate as also to take into account political equations , makes the whole thing very lucrative for taking benefits without anybody coming to know the whole game. So, naturally , in garb of taking care of public interest , the money can be made and stashed abroad far more easily.

The only policy that can counter ill practices is to let all aspects of it be freed from any kind of govt control and left open to traders, producers and marketers . This itself will ensure that petroleum products are sold far more cheap then at present and any price movement necessitated by the changing demand and supply equation would be moderate and well absorbed. An Indian household can well do without petrol but not without milk, cereals and gold for the daughter’s wedding.

We had highest GDP in Mughal era but did not have need for a drop of crude oil . We can develop our economy in a way that does not rests too precariously on imported petroleum. Thinkers should pay attention to finding ways and means to reduce dependence on oil as a major item of input for every economic activity. This way only can we make our nation of 1200 million people happier, without living in fear of oil not being available . It is not going to be available sooner or later , so why not get ready for it sooner rather than later.

The cost component that has relation to crude price and currency rates is just not more than 30% of the price charged to the consumer. Is it not a fraud on people to find it necessary to jump the prices so vehemently .

We Indians should know it clearly that the crude oil import and selling a piece of India are directly proportional. How long then we have liberty to let it go on. People are made to believe that the FDI (foreign direct investment) and FII ( financial institutional investors) inflows are good for nation to balance the currency need generated out of crude import . Please understand this does not come without India and Indians committing rather mortgaging future of coming generations. Greek made merry on borrowed money and now they have a constant pain in neck , their own and of others.

I do have doubt about our democracy remaining safe in such hands which have no other work than to be busy matters of safeguarding ill-gotten wealth . The other occupation is to try and keep the attention of people from matters that are really important. The public does not understand the complexities of today’s economic and political environment and plays right in to wrong hands.

A solution for Greek problem

The Greek problem is keeping the world’s financial markets on tenterhooks for a long time already and with a possibility of extending far in to future which is bad for everybody. A solution has to be found after all and it should have the minimal impact on all stake holders. I suggest the following to take care of it :

-the outstanding Greek sovereign debt may be made redeemable over the next one hundred years at the rate of 1% every year.

-it should carry coupon rate of 1% per annum.

-the debt redemption as well as interest should be guaranteed by all 17 nation in Eurozone in ratio of their respective GDPs .

-the trading in the such debt paper should be stopped , however, a suitable advance against the receivables may be made to needy by the lender on a temporary basis.

-the ownership of such paper should be allowed to be transferred between two entities in discharge of financial obligation on a basis of mutual understanding.

-necessary curbs and restrictions should be allowed to be imposed on Greek govt by rest as may be in their power even without Greece agreeing to them but only in case Greece has more than three years discharge obligation pending. As soon as it is able to bring it back to under three years , the restrictions should be revoked.

I think some thing on the above line may spread the impact equitably and over time without room for speculation about the eventual happenings. If part of the burden is acceptable to world organizations against certain dos and don’ts committed by the Eurozone nations then it should be welcomed.

Should there be a further market fall

The Nifty briefly breached the 4900 market on the down side on 14th May 2012 but closed a shade above 4900 . This was the fifth day of fall and mostly on back of European concerns . This level of Nifty is interesting on account of the fact that this represents the P/BV (price/book-value) of 2.88 , PE (price/earnings) of 16.95 and Div. Yield of 1.63% .

Going back by exactly one year the three ratios were P/BV 3.48 , PE 20.60 and Div. Yield 1.22% . On 20/12/2012 P/BV was the lowest in the whole year at 2.71 along with PE of 16.46 and Div. Yield of 1.66%. Since then it has never been lower and as the months go by this should be distancing itself from the low point of 2.71 due to further addition to book values. An additional plus point is that while the P/BV is low (i e better for investor) the other parameters i e PE is also low (i e better for investor) and Div. Yield is higher ( i e better for investor). When all three are at inviting level historically and over the last one year , the Nifty and markets in general should see their bottoms reached now or in near future.

Morgan Stanley have pointed out and interesting fact that whenever the P/BV has gone lower than 3 in past there has been good jump in returns over the next twelve months. On 15th June 1999 when Sensex was just 3901 and P/BV was 2.9 the return was 19.3% after a year , on 28th My 2004 the Sensex was at 4854 and P/BV had reached at 3 the returns after a years were astonishing 38.7% and like wise when on 10 Oct 2012 Sensex sank to 10527 the P/BV became 2.8 ensuring returns of whopping 58.1% after a year.

When we consider the time period between the above three events , it is five years in the first instance (1999 and 2004) and four years and six months in the second case (May 2004 and Oct 2008) It has been four and a half year since Oct 2008 already i e time gap allows repetition of the same phenomenon .

There has been a mini show of the similar kind when post Dec 2012 the Nifty was taken up from low of 4600 (P/BV was under 3) to high of 5600 (i e +20%) and the reversal happened equally fast. So, there may be a remote chance that Nifty once more visits 4600 or even some further low point but then it will be readying itself to pole-vaulting to new high.

Unless enough time elapses these kind of moves in markets may not be taken as naturally happening , however, there have been instances when the operators swayed the markets without the fundamental support. If we consider that big cartels or players will again enter, they may act only in the direction of upping the markets as they will find it hard to press the markets from the low levels obtaining just now.

I talked of markets pole-vaulting and recount the development that may make the conditions ripe enough for it. Firstly the top line of companies has grown by over 100 % since 2008 . This means that assets reflected by book values are productive only.

Secondly, the crude is at high point and may see some correction .

Thirdly , we have already put up with dear money policy for last year and a half and mat see the reversal of the same continuing which began some months back.

Fourthly, the gold prices have been continuously going up since 1999 during which period markets have also been moving up albeit in ‘two step ahead, one step back’ manner. The gold happens to be at a price point that when it will come down the preference for equities will grow and reversely if it goes up equities would be going up too because this will suggest that monetary expansion is happening

Lastly, the weakening rupee will help exporters and strong rupee will balance the budgetary deficit. We have gold as a balancing factor too to moderate the impact of currency price changes.

There is yet another point i e the return on equity for the corporates is nearly 20% which should be inviting enough for the foreign capital. Inflation is one factor that I can’t judge anything about because it has been always been high in India may remain high for more number of years till we reach next higher level in economic terms.

In light of what I have stated above , it may not be a bad idea to buy stocks when the levels are low but it may prov to be counter productive if entry is made when the markets has already covered half of the expected up-move as was the case in recent past.

I have not tried to sell India story, I have not tried to show any extra-ordinary bullish fervor , I have only recounted some facts. What’s in store , no body can judge with certainty. An investor has to after all find some logical base before committing capital. I have just given that to you to decide.

RBI struggle to arrest rupee fall

The markets have shown distinct weakness after the recent surge in dollar value and rupee fall. The RBI has been struggling to arrest the fall in rupee value against dollar. The crude is keeping a clam posture. The gold prices have started to tumble down.

Now, I wonder, what goal RBI has in mind; what makes it competent to intervene in market where it doesn’t have a say in the arena of imports and exports of commodities and the capital flows. But old habits dye hard. Whenever there is fluctuation it has to sit up and take notice (which is OK) but it then decides to intervene without any body having an inkling as to the purpose or the target. It also remains an area of confusion as to what is the strength of kitty in RBI’s hand and what portion it is ready to commit for the purpose at present. The timing, length and strength of intervention are all unknown to all others and may be to them too.

Further, if we are so prone to scams by the governing arms , what makes RBI machinery not vulnerable to working in a way that would benefit some in a designed manner. In this light , is it not good for them to stay neutral and let the market forces arrive at a point of parity between dollar and rupee on an ongoing basis. The RBI’s intervention upsets all in the field and rational hedging program can be put in place by the parties affected by fluctuation in currency sphere .

Just by the way I put before you the manner in which some would have taken advantage of movement in dollar values. In December ’11 when the markets were very badly down and when the dollar surged in value a lot of FII buying took place . This made the markets go up in a way that seemed to be unnatural but then it was thought that FII entry has done it. Now in the intervening period dollar was down and markets also subdued . This was taken to be as adjustment and balancing after stark moves. But lately when the dollar gained back strength and went past Rs 53 , the market did not see any inflow from FIIs. The results in the mean time have not been any poorer than the last year at gross level but market is down by over 10%. This, seen against the dollar value an year back, makes the total discount available to FIIs well over 25% in dollar terms . Add to this the earnings retained for the past one year and we find the market cheaper by over 30%.

To understand the above better please note that the dollar was 44.84 a year back and scaled up to 53.76 on 14th Dec ’11 . It trades at 53.53 just now.

Of course there is some trouble brewing up in Europe but it should not be affecting us more that it does the European economies . Secondly , those seeking safety in international markets should eye India as it has shown better resilience in financial regulatory framework.

The future is difficult to be looked into . It was not rightly seen last year when the markets were adjudged having more value and similarly we can say anything with certainty today as to where the market would be one year down the line. It can however be safely assumed that earnings of companies will be more or less the same. When such confusion abounds , the ratios only can guide us. The ratios are favorable enough and hence the slide should stop at some point shortly unless some earth shattering event takes place when nothing would be keeping our savings safe.

Even gold has lost capacity to keep purchasing power intact as it is itself at a high point historically , see below for the perspective:

- Lowest Gold price since 1973 : $63.90/oz

-Gold price touched high of $805/oz in 1980

-Lowest Gold price since 1993 : $252.80/oz

-Lowest Gold price since 1998 ; $252.80/oz

-Lowest Gold price since 2003 ; $302.25/oz

-Lowest Gold price since 2008 : $640.25/oz

-two year low price : $ 1158/oz

-one year low price : $1479.80/oz

-six month low price : 1540.90/oz

-two month low price ; 1593.90/oz

-30 day low price ; $1593.70/oz

-today’s price : about $1600/oz

-Gold prices (one year back) : $1500/oz

-all time high price : $1900/oz

The gold has shed about 15% value against the peak price. In case of our markets also there is loss of about 15% form peak . But the difference between gold and equity is that gold is non-productive and the equity is productive asset. For gold you have to incur cost for keeping it while equity rewards you with dividends.