Prabhakar Deshpande
Indian economy is slowing down and slowing down rapidly. An economy that had managed to reach growth rates of 9 per cent has slowed down and is barely able to manage 5 per cent. Of course, it may suit some political forces to make hay while the sun shines and capitalise on present economic predicament. One does not grudge such political opportunism.
However those, who seek a better economy, would want to diagnose the nature of malady. After all there is no guarantee that a change of government will bring economy on track. Indeed, while the problem is evident to all – low growth rate, high inflation, huge current account deficit, mounting fiscal deficit, depleting foreign exchange reserve – there is nobody to offer solutions.
But here is a clue; it is not as if only Indian economy is in doldrums; China’s growth rate is plummeting from heady 12-14 per cent to respectable yet mellow 7 per cent. Economies around the world are muddling through and there is very little to cheer and indeed commodity prices all over the world are falling drastically.
‘Commodity prices,’ did you say? Does that mean gold, silver and that sort of thing? Well, yes. Does it include crude oil? Yes to that too. But, hey – crude prices aren’t falling are they? Nope.
That’s an anomaly. How come the global recession is not having expected effect on crude oil prices? Well, what if crude oil price were the cause of global recession?
Indeed that very well could be the case. Since 1960s, most recessions – at least of global nature, have been almost invariably been preceded by spike in crude oil prices. And that should not be surprising.
Consider for instance if the crude oil price rises from $ 30 a barrel to say $ 100 a barrel, the world would spend $ 3 trillion a year on crude, instead of $ 1 trillion on crude. That can significantly impact a global economy of around $ 70 trillion.
Hmm……sounds logical. But what is the cure.
Well just on a trial and error basis, here is a possible remedy to the malady.
Crude oil price like any commodity price is determined by supply and demand conditions. No, surprises there! But what is interesting in crude oil context is that the supply is significantly regulated by a cartel – OPEC – Organisation of Petroleum Exporting Countries.
OPEC regulates crude oil price by reducing supply, so that the reduced supply causes price to escalate. Interesting, isn’t it!
What is more interesting is that OPEC reduces supply by a very small amount 3-5 per cent and that escalates the price by over 100-300 per cent. This is getting even more interesting.
Supply is just one of the factors that determines price. The other factor that determines price is demand. What if it is also possible to reduce demand by global effort? How would you do that?
You would do that by reducing demand by creating an oil importer’s cartel – let us call it OPIC – Organisation of Petroleum Importing Countries.
Now there is an urgent need to create an OPIC that balances the power of OPEC. OPIC could include almost 150-175 nations.
OPIC could reduce oil demand by encouraging their citizens to switch to public transportation, by car pooling and by telecommuting.
There is no guarantee that the oil importer’s cartel will work. Indeed one can be rest assured that there are going to be huge hurdles at every step – right from creating the cartel, to certainly attempting to make it effective.
But do we have a choice? We are up to the neck in deep water and with our back against the wall. We have little choice but do all that we can to control oil prices and thereby restore order to global economy that has been hurting badly for quite some time.
