Warning: US$ 200 a barrel oil coming - The 5 Minute WrapUp by Equitymaster
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Warning: US$ 200 a barrel oil coming

Feb 25, 2011

In this issue:
» Govt. more focused on growth than inflation!
» But the RBI has its eyes set on the latter
» Dr. Doom is positive on this commodity
» Economic Survey 2010-11 paints a rosy picture
» ...and more!

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00:00
 Chart of the day
 
The crisis in Middle-East and North Africa (MENA) has led to a surge in oil prices in recent times. International prices have crossed over the US$ 100 a barrel mark in response to the violence in the leading oil producing nations. However, as the chart shows, the comforting part is that the countries currently facing strife - Algeria, Libya, and Egypt - aren't mega producers of oil.

Data Source: BP Statistical Review 2010

But the fear is that the situation can get out of hand if violence spreads to bigger producers like Saudi Arabia, Iran, and Iraq. In fact, predictions have already started flowing (first time since 2008) for oil to reach the US$ 200 a barrel mark. Now, if that were to happen, it would seriously dent the global economic recovery. We do not need to look farther than India, as we would be seriously hurt if oil prices were to surge in the coming months.

Do you think oil prices can reach US$ 200 a barrel in the short to medium term? Share your view or post your comment on our Facebook page.

00:41
 
Amid the Middle East turmoil, gold and silver spot prices in Mumbai (India's biggest bullion market) rose to all-time highs. The investment demand in these precious assets doesn't seem to ebb. India's food grain production is expected to rise 7.2% YoY to 234 m metric tonne this crop year through June due to higher planting. Hence, a lot of demand for gold is expected to come from rural consumers. Also, the interesting fact is that these consumers do not have much exposure to other investment avenues. So gold is the only option at their disposal.

01:05
 
Continuing with gold, Dr. Doom Marc Faber has made a bright forecast for the metal. As per the legendary economist, the only things worth hanging on to in this world is gold and other precious metals silver, palladium and platinum.

The reason behind this is the 'ballistic' nature of US policies. Let us try and explain this. As per Dr. Faber, US will not default on its debt or declare bankruptcy because it will continue to print money. This money will stoke inflation and lead to higher prices especially for food and fuel. As a result, the world will see a phase wherein currencies will lose all its value. And the only thing that would remain valuable would be the safe havens- precious metals. And also thanks to this policy, US will head itself to a painful death. Death at the hands of its irresponsible policy makers. And the only one rejoicing at US' funeral party would be the precious metals gold and silver!

01:46
 
"Inflation will be curbed, but not at the cost of growth." These are the words of our Prime Minister who is also considered a leading economist in his own right. We believe these words are a little startling.

Growth for the sake of growth is the ideology of the cancer cell. But it seems that the PM and his policymakers do not agree with this age old saying. What they do not seem to see is that India's fast economic growth hasn't benefited the mass of its population. What it has done is just widen the divide between the haves and the have-nots.

Inflation, on the other hand, has kicked the common man where it hurts the most. Inflation is a silent killer, while growth is an antibiotic. And just like a quack, the government seems to be only focusing on curing the patient (the common man) by offering him the antibiotic of economic growth, while not bothering about the deadly cells (inflation) that are eating the core of his body.

We have no issues with India growing at a fast rate, but what worries us is when such a growth is accompanied by high inflation. Agreed that not everything is in the government's hands to control inflation, but focusing more on growth and less on inflation is what worries us. Inflation is a bigger demon to slay. Possibly India's policymakers can take some lessons from Paul Volcker, the former US central bank chief, and his fight against high inflation in the early 1980s.

02:48
 
Desperate situations call for desperate measures. Looks like the RBI is all set to adopt this motto. India's central bank is scheduled to meet on March 17 for a rate setting meeting. Another hike in interest rates is a foregone conclusion now. More so in the backdrop of a rise in food inflation and of course, the gravity defying crude oil prices. However, should the situation demand, RBI is not averse to responding even immediately should things take a turn for the worse. "Notwithstanding scheduled quarterly and mid-quarterly reviews, we reserve the right to alter our policy stance at any time to respond to the evolving macroeconomic situation", RBI Governor, Dr. Subbarao is believed to have said. The Governor also acknowledged the fact that he faces a big challenge. Managing the tension between demands of growth and inflation that is.

We agree that the central bank has mostly been behind the curve when it has come to raising rates to tackle inflation. But it is heartening to know that unlike a certain Bernanke who just blindly dismisses talk of any inflation, the RBI at least has its heart in the right place! There is another instance where the RBI let its maturity and pragmatism come through. We are talking about the issue of currency wars. With respect to the same, the RBI is pretty clear that currency rates have to be determined by market fundamentals. Targeting a specific rate or a band is certainly not the way to go. We couldn't have agreed more.

03:51
 
After yesterday's hammering, Indian stock markets had a better day today. The BSE-Sensex was trading with gains of around 30 points (0.2%) at the time of writing this. Today's gains were largely led by stocks from the banking and FMCG sectors.

All other key Asian markets closed mixed. While gains were seen in Hong Kong (up 1.8%) and Japan (up 0.7%), selling marked trading in China (down marginally).

04:02
 
The countdown to the Union Budget 2011 has begun with the Economic Survey being tabled today and the Railway Budget being presented by the Railways Minister Ms. Mamata Banerjee.

Indeed with elections coming up in West Bengal, expectations were that this rail budget would be a populist one. She began her speech by stressing the need for 'building sustainable, efficient, rapidly-growing railways' while at the same time laying emphasis on social inclusion of the common man. As was envisaged, no hikes were announced in passenger fares as well as freight rates.

Some of the highlights included laying emphasis on businesses forming partnerships with the railways. A special drive was announced to improve passenger amenities and Rs 13 bn has been set aside for the same. Moreover, 117 new trains will be flagged out by March 31. In what will give the beleaguered Mumbaikar reason to cheer, 101 new suburban trains were announced for the city.

As for the Economic Survey for 2010-11, it has projected India's GDP to grow by 8.75-9.25% in the next financial year FY12. However, it has warned that inflation may remain high on the back of high food and fuel prices.

04:57
 Todays investing mantra
"Value stocks are about as exciting as watching grass grow. But have you ever noticed just how much your grass grows in a week?" - Christopher Browne

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26 Responses to "Warning: US$ 200 a barrel oil coming"

AJMAL HUSSAIN

Mar 10, 2011

The US has repeatedly induced geographical and demographical military imbalances across the world. This is akin to it's ideological policies of creating fear more amongst the third world countries.The US is also finding it hard to digest the fact the China and India have unprecedented and unexpected growth rates, immaterial of the inflationary trends that have set in because of varying reasons.
Immaterial of it's inherent policies, the US will try hard to intervene and disturb the peace that exists within the MENA region. The US is left Choice less, and will soon embark upon IRAN and also on Libya, creating an artificial scare across the world, de-stablise the region, have it's military equipment industry back on track, help the dollar to re-stablise and have the barrel shoot 200. The US invariably will and wants to control the OPEC and therefore the governing prices
Needs real UN Intervention, except of course if the UN remains a puppet with US based Policies, US WILL GO AHEAD AND DE-STABLISE THE World.

Like 

kongan

Mar 10, 2011

It is all exaggerated by media and financial crooks.
In reality it can not happen, but by playing with human nature, it can be made to reach higher level than now but NOT upto 200$ in short term.

Like 

Rajeev Kamal

Feb 28, 2011

If gold can touch astronomical heights (I have seen gold at Rs 700/- per 10 gms) to Rs 21,000/- plus; property can shoot from Rs 100/- sq yd to Rs 1,00,000/- a sq yd and more, why not oil if demand supply gap shoots up. Energy is a engine driver for all economies of the world. Like wise water in the future can be a scarce commodity when ground resources are difficult to come by. This is not reflection on performance of any govt but just economics.

Like 

Vivek Mahajan

Feb 27, 2011

It takes a life-time to build reputation and just a few moments to destroy it. Please stay away from the lure of cheap sensational journalism. Your 5-minute Wrap Up is drifting from quality write-ups to cheap sensational street stuff in trying to justify the daily market movements through correlations.

Do you have any research or risk analysis to justify your figure of USD 200? Why not 220 or 375 or 440? How did you arive at that figure of 200? Have you done a research on how oil price rise can negatively impact the oil rich nations and how scared they become when these financial mafias drive oil prices on speculation in the commodity derivative markets? Have you done any research how and why wars have been triggered in the past......the latest being Iraq. For God's sake stop writing garbage and maintain your balance.

Like 

A.K.Mitra

Feb 26, 2011

Yes the price will go there within a range of 5 year but we may hope that by then an alternative fuel may come up.

Like 

ATMA RAM KEJARIWAL

Feb 26, 2011

IN ALL PROBABILITY NOT IN 2011

Like 

jagdish

Feb 26, 2011

within 2011 itself it may cross $200 mark

Like 

DILIP

Feb 26, 2011

Oil prices will most likely touch the figure of US$ 150 in medium term like during 2007-2008. But at that level solar and other renewable en energy sources will become competitive or even cheaper and that will prevent Oil from going higher.

Like 

neil

Feb 26, 2011

no its not possible

Like 

dharmesh trivedi

Feb 25, 2011

NO IT WILL NOT HAPPEN IN NEAR TO SHORTTERM BUT COULD POSSIBLE IN LONG TERM . IN MY EXPECTATION SHOULD BE AROUND 2016 2018

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