Is being self-reliant on crude oil stupid? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is being self-reliant on crude oil stupid? 

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In this issue:
» Are India's mega cities disasters waiting to happen?
» India Inc not happy with RBI's liquidity squeeze
» Is an MBA degree losing its sheen?
» QE to not end in a hurry, feels Gross of PIMCO
» ....and more!


00:00
 
Everyone loves ideas that turn conventional wisdom on its head. We therefore got intrigued when we came across one such idea recently. It concerns the issue of energy security. And has been proposed by none other than Charlie Munger, a man we respect a lot. You see, the conventional wisdom in the area of energy policy has been that a country should try to become as much energy independent as possible.

Not known to mince words, Munger launched into a scathing attack on this kind of stance of the US Government. He argued that the policymakers are barking the absolutely wrong tree by supporting energy independence. As per him, energy independence is a really dumb idea.

To help understand why, he argued that oil and gas are absolutely certain to dwindle in quantity and thus, could also get highly priced. Consequently, by using up its domestic reserves, US is leaving very little for future generation to use and survive on.

As a matter of fact Munger loves what China is doing. He opines that China is suffering now to benefit later. China is relying heavily on imports and is thus preserving its own domestic reserves of hydrocarbons. Thus what Munger seems to be saying is hydrocarbons are absolutely essential in running an economy and are also non-renewable. Therefore, the less we use it from our own national borders and the more we import, the better it will be for a country's long term energy security.

As always, we do believe that Munger does make a lot of sense. But blindly adopting his advice in India would be a recipe for disaster according to us. Of course his arguments have now become a stick with which to beat those who argue for energy independence in India.

But is high oil imports really a problem for India? It could be. But we believe a bigger problem is the absolutely low energy productivity. Had we used the oil we import sensibly, we would have had a strong economy and robust exports. And higher exports would have meant that we don't run into the currency problems we are running into right now.

Thus, India's problem is lack of reforms and not high energy dependence. For tomorrow, even if we unearth a massive oil discovery, the lack of reforms will ensure we squander it away and still have the currency problems we now blame on high oil imports. Thus, the key is to improve productivity and encourage other sources of energy so that we are not reliant on non-renewable hydrocarbons alone.

Do you agree with Charlie Munger that high energy dependence is not such a bad thing after all? Please share your comments or post them on our Facebook page / Google+ page

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01:31  Chart of the day
 
Amidst a steady flow of negative news on the Indian economy coming in from all quarters, there was finally something to cheer about. As per the Planning Commission, poverty levels in India came down to 22% in FY12 as opposed to 45% that existed back in 1993-94. In fact, the fall has been steady over the past couple of decades. But criticism has started pouring in from many quarters, arguing that the result has not been achieved by way of achieving the goal but in fact, the entire goalpost has been shifted to make the numbers look good. Consequently, the entire methodology of poverty estimation is now being reviewed. While the final numbers could look higher, there can be no denying the fact that some success in reducing poverty has certainly been achieved. However, what's also true is that lot more needs to be done.

Source: Indiaspend.com, livemint


02:12
 
A post graduate degree/diploma in management has almost become a norm in India. Irrespective of their field of education, nearly every person in the country aspires to get the revered MBA tag. Why? Because it helps them get a better job. And it was almost a given. People considered MBA to be an investment to get a higher paying job. As a result, there were MBA colleges cropping up in every nook and corner of the cities. But in recent times, the slowdown has started to bite into the salaries being offered to MBA candidates. As per an article carried by Firstpost, candidates spend nearly Rs 9 lakhs to get an MBA but get jobs that pay only Rs 4 lakhs. So is this mismatch purely a result of the slowdown or is there another explanation for this?

One reason for this is that with so many MBA institutes and colleges there is excess supply. To add to this, the quality of education being given in most of the colleges is not too good either. In the current scenario of companies facing a slowdown, they are desperately looking for talented individuals to help them boost their growth. And this is where most MBA colleges have been failing to deliver.

02:54
 
The squeeze on short term liquidity by the RBI has not amused many in India Inc. The chairman of the country's biggest bank, SBI, in particular has been most critical of the move. In addition, several other entities are concerned about short term financing getting unviable. While most opine that the move will not hurt bluechips, the health of smaller entities is at stake. More importantly the choked liquidity scenario could bring the snail paced economy to a temporary standstill.

The silver lining is that most corporate agree with the RBI's compulsion in taking the distinctly prohibitive move. That stemming the rupee's fall against US dollar was possible only by stopping speculative activities is well recognized. Corporate India is now looking forward to banks donning a hat of generosity for productive sectors. Instead of diverting funds to unproductive sectors like real estate, it expects more funds to go towards manufacturing. All said, the latest move by the central bank seems to be yet another litmus test for India Inc. Those who can come out of it unscathed may win favour amongst investors too.

03:31
 
One of the biggest challenges that India faces is extremely poor infrastructure. Take the big metros. A few hours of downpour can bring these mega cities to a standstill. How prepared are we for bigger disasters? The recent calamity in Uttarakhand says it all. Haphazard construction and inadequate disaster management cost us thousands of lives.

What if a similar calamity struck any mega city that houses tens of millions of people? Be it Mumbai, Delhi or Kolkata, the preparedness for any major calamity is close to zero. Low probability of disaster should not be mistaken as zero chance of disaster.

There are numerous cases around the globe of cities collapsing on account of natural disasters. Many, who learnt the lessons the hard way, committed themselves to building more sustainable and resilient settlements. It would be too naive of us to assume that nothing could happen to our place of residence. Can we learn lessons from the mistakes of others? Or are we going to wait for disasters to rebuild sustainable cities?

04:07
 
When the US Fed recently announced that it was most likely to taper off its QE program, financial markets the world over took this as a negative sign. That is hardly surprising. Given the massive amount of liquidity that was injected into the system post the crisis, most of this money found its way into asset classes thereby inflating their prices. Hardly any went towards capex and investments which are what would have helped the economies limp back to recovery. As a result, most of the economies of the developed world are still mired in recession. Unemployment and weak job prospects continue to rule the roost. Meanwhile, asset prices have rallied only highlighting the disconnect between markets and the ground realities.

So, it goes without saying that the Fed's so called exit from QE is hardly going to be smooth. Infact, Bill Gross of Pimco opines that he does not expect QE to wind down any time before 2016 at least. What is more, Ben Bernanke since then has also started making conflicting statements. The latest being that the withdrawal of QE would depend on how the economic data shapes up. If that is the case, we agree with Mr Gross. It seems highly unlikely that a financial system which has been propped up by steroids will hold up once these are just taken away.

04:52
 
Meanwhile, indices in the Indian stock markets traded weak today as well with the Sensex lower by around 200 points at the time of writing. Stocks from FMCG and power space were seen exerting the maximum pressure.

04:57  Today's investing mantra
"If I have noticed anything over these sixty years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market."- Benjamin Graham
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9 Responses to "Is being self-reliant on crude oil stupid?"

B.Prabhakar

Jul 28, 2013

Charlie Munger`s comments may be relevant to his country the USA. India is different as our survival as a viable economy is at stake in the immediate context, forget about future generations. USA does not spend 70%/80% of its foreign exchange to import oil and this foreign exchange earned by exports and remittances from workers abroad is not dependable.Our finance ministers visit to the USA requesting FII`s to invest and stay invested, when they are withdrawing their money from Indian markets and our rupee fall just exposes how fragile our economy is, and after 60 years of our independence, how our policy planners and bureaucrats not to mention the politicians are failing our country.

Like 

sanjay kansara

Jul 26, 2013

This in line with your to-day article, I ould like to add one thing that Indian country which run BY 543LMA(White swan),illiterate men rules on literate men. Its our bad and hardluck.

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Rajagopalan Ramesh

Jul 25, 2013

Petroleum Import along with gold are biggest curses for India's economic development. Howsoever efficient the methods to which the imported resources are put to use, they ruin the national finance, to the total detriment of the present-day citizens. India has almost 70% of its nation as poor and squandering or wasting resources are worse than any crime in India. With democracy and federal set-up as basic political structure coupled with such wastage of national finance and resources, India will become poorer day by day and will ever be an underdeveloped country in the world.
Sacrifice for the future generation at the expense of our own lives and welfare is a total misconception. If that be the fundamental factor, why should developed nations cause such a great amount of environmental destruction in the form of pollution, contamination, global warming conditions etc., and shift all such viruses to countiries like India.
The Arab nations though have a vast stretch of deserts continue to be rich and prosperous only because of their oil reserves and their continuous expoloitation of the reserves to their advantage and the benefits are reaped only by the existing population.
Thus, there is absolute justification for being self-reliant in oil explorationa and production. All these are subject to good governance of the incoming new Government in the coming year. Let us hope for the best.

Like 

virendra

Jul 25, 2013

Dear sir,India current deficit will only be controlled when people will consume less petrol& diesel and our politician and bureaucrat will not go for Inauguration of any thing with large number of vehicles along with them.
Our roads must be smooth so that in city areas people can use cycles which will also improve their health.See large number of people using cycles in china due to their smooth road. Thanks and waiting for your reply.

Like 

p v ranganathan

Jul 25, 2013

For India, energy efficiency is of utmost importance, but the Govt. is absolutely corrupt and allowing itself to be held hostage by the Auto lobby. Instead of enforcing the fuel efficiency norms for oil driven automobiles/ vehicles, the Govt is asking the Armed forces to economise their trips to save fuel!
That is the calibre of the politicians we have!

Like 

Rustomji F.Daruwala

Jul 25, 2013

As the alternative source of energy are explored in a massive way, I feel future source will no longer be Petroleum based. Hence country should make full use of its present resource. As they say "One ina hand is better then two in a bush"

Like 

S N Balakrishnan

Jul 25, 2013

The strategy may be ok for India if our imports are less than 50%. With imports approaching high 80s and may even touch the 90s it will be suicide for India unless we augment our energy resources. Of course one of the ways is energy efficiency improvement and it will be worth for the govt. to eliminate incandescent lamps in the entire India and ban them a year after subsidising energy efficient lamps. Better use of technology for control of street lighting can pay high dividends. Subsidy for replacing inefficient motors in water pumps and other industrial uses by giving tax concessions must be a priority. Better roads where vehicles can move at 30 to 40 km/h will cut down fuel consumption s and better public transportation systems will reduce vehicle usage for single persons. Will the govt. have the farsightedness to insure the future of Indians?

Like 

monish gaur

Jul 25, 2013

character is more important than anything, I mean look at USA, Obama steered them out of a quagmire, we were steered into one, naah many large ones. as far as munger is concerned his ideas are like mungeri lal.......haha

Like 

Ajay Gupta

Jul 25, 2013

It appears that our leaders are takings things for granted take the case of any disaster or any thing they are fast in announcing compensations coming from Govt. funds (tax payers money)but comes from their funds is nio, it appears they wwant these things to continue for there benefits as most of the peope will be busy in these affairs instead of asking any development or progress related questions. See the average politicians no and assets of each politician now from independence time.

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