Another crude shock on the way? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Another crude shock on the way? 

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In this issue:
» Crude oil prices to reach US$ 300 per barrel, says Pickens
» The financial system will collapse in five to ten years, says Faber
» Unique Identity only for the needy
» Worst monsoon in 40 years
» ...and more!!

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It seems another crude shock is on the way, if legendary oil billionaire T Boone Pickens is to be believed. He says that the global supply of crude oil is permanently stuck at 85 m barrels per day. However, demand will keep rising over the long term. The result, Boone Pickens believes crude oil prices will keep rising higher, possibly reaching US$ 300 per barrel.

He says "Look at the history, it proves oil prices will go up." He also offers a solution. Right now, switching power generation and transportation to natural gas instead of crude oil will help take off some of the demand. Over the long term, increased focus on renewable sources like wind and solar power will help.

In our opinion, Boone Pickens is right. There simply haven't been any major oil field discoveries in the last several years and it is only a matter of time before the average Chinese and the average Indian starts consuming much more per capita than he does now. The long term trend for crude oil prices is definitely upwards. This opinion is shared by some eminent investors, including Warren Buffett and Jim Rogers. Given the amount of concern that crude price in the range of US$ 147 per barrel generated last year, the amount of financial havoc prices in the range US$ 300 per barrel will create can well be imagined.

00:56  Chart of the day
It is said that there is no escaping death and Income Tax. That certainly seems to be the case for the average Indian. Calculated at an income of US$ 100,000, Indians pay one of the highest rates of taxes (including contribution to social security like Provident Fund) anywhere in the world. While some believe that income taxes is price we pay for civilisation, it is also true that excessively high tax rates discourages economic activity and encourages black money.

While US$ 100,000 is indeed way above the income levels of the average Indian, we hope the new direct tax code set to be introduced will revisit India's historical aversion to money. After all, without wealth creation, equitable distribution of wealth can only be empty talk.

Source: KPMG

Sample these statements. Ben Bernanke is like a ship captain who gets a medal for bravery for saving his crew and drowning thousands of other people on the ship. The soundest investment right now from a long term perspective is a gun and a farm. The whole financial system will collapse in five to ten years. These are just some of the isolated tidbits from a recent interview of Marc Faber, the man who perhaps has the most unparalleled reputation in recent times of being an outspoken and a contrarian investor.

Speaking to an Australian TV channel, Faber opined that the stimulus programs currently underway might provide some near term relief to the economy and will be followed by another stimulus. But sooner or later there would be another crisis and things will come to a point where the US will no longer be able to service its debt, thus leading to a collapse of the entire system. As mentioned, he did not have very good words to say about Ben Bernanke as well, arguing that although Mr. Volcker was a very good choice, he seems to have been systematically isolated from the decision making machinery. He heaped further criticism on Bernanke and accused him and Greenspan of giving rise to the crisis by allowing reckless credit growth. While Mr. Faber could not think of any scenario that might save the world from the outcome he has predicted, he did believe that Asian economies were perhaps the only real rays of hope as their domestic markets are still very strong and most of them have amassed robust foreign exchange reserves.

The anxiety over the monsoons remain as water levels in India's main reservoirs are still at only 42% of capacity as on August 27. This is on the back of India's poor monsoon season this year, which is set to be the worst in last 40 years. What's more, the slow filling of reservoirs is also putting winter crops and power generation in the limbo. The weather bureau has said that September rainfall may improve, but even then, this year's monsoons would still be about 20% below normal. The deficit rains have badly affected India's rice crop and have also hit soybean, cane and groundnut crops. They have also disrupted the flow of water into the main reservoirs that are vital for hydropower generation and winter irrigation. Though India emerged relatively unscathed from the credit crisis when compared to the West, the monsoon related problems might just end up being the country's biggest problem area.

Apparently, the Nandan Nilekani led Unique Identification (UID) number will not be mandatory for people. According to the planning commission, UID is expected to be demand-driven and will be for people who are not comfortably placed in society and need the assistance of government welfare schemes. The population covered under welfare schemes like National Rural Employment Guarantee Scheme (NREGA), integrated child development scheme, nutrition programme for adolescent girls and benefits under the targeted food distribution systems will require the number, while people who are not covered by such welfare schemes might not necessarily require a unique identification number. Given the enormity of the task of covering over a billion people, we believe, it indeed makes sense to get the priorities correct.

Despite having a generous coastline of 7,517 km, India's infrastructure on the coastal front leaves a lot to be desired. And yet, as reported in a leading business daily, the Union Environment Minister Jairam Ramesh has stated the government will not accept any new proposal for setting up ports or expansion of existing projects along the country's coastline till a policy to regulate their activities is evolved. Besides, protecting the rights of the fisherfolk in the coastal areas, what has also propelled this decision is that many of the infrastructure projects along the coastline have caused significant shoreline changes and hence this move is more environment driven. As a result, Ramesh's ministry has imposed a three-month moratorium on proposals it had received for new ports besides expansion of existing projects. Obviously, the government is trying to strike a balance between developing ports along the coastline and at the same time making sure that not much environmental damage is done. How it will manage to achieve this is the million dollar question.

After a dismal start in the morning, the Indian markets continued to lose in subsequent trading sessions. The BSE-Sensex was trading 270 points below the dotted line at the time of writing. Only realty stocks are trading in the green amidst extensive profit booking across all the other sectors. However, the BSE-Midcap and BSE-Smallcap indices managed trading in the positive. On the global front, while key Asian indices closed in the red, European indices are trading firm currently.

04:50  Today's investing mantra
"Pessimism is the most common cause of low prices. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer." - Warren Buffett
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12 Responses to "Another crude shock on the way?"

Baby Davis

Sep 1, 2009

when i was a student in 1980s we were taught that the fossil fuels would be last only for 40 -50 years. That time renewable energy sources like Biomass, wind energy, solar energy etc were presented as a alternative sources of energy. But the price of crude oil was around 5$ per barrel only and alternative source of energy was not at all atractive on the price front.If the price of the crude again cross 140$ and stay there defnitely other sources of energy become viable.



Sep 1, 2009



I S Cheema

Aug 31, 2009

If the entire financial system of the world will collapse, has Mr. Marc Faber started diluting his investments into cash? Please advise him that if he has to make such sweeping statements, he must along side give suggestions as well to over come then anticipated situation.


trade river

Aug 31, 2009

Better concentrate on trading commodities, which are the basic needs... like Crude, Lead, zinc, gold, silver


Syed Taffazull hussain

Aug 31, 2009

What oil billionaire T Boone Pickens is saying is utter nonsense.Alternative sources of energy like Solar,Wind,Geothermal and many others have been kept from developing by the low price of crude.Even when crude had risen to $150 a barrel wind energy and wind energy companies like Suzlon were having a field day.It would be a great boon for everyone if crude prices were to rise to $150 a barrel for that would give a boost to
alternative energy and energy efficient technologies which would make crude obsolete as an energy source.

If all the energy guzzling incandesent lamps in India were to be replaced by CFL's and LED Lamps India would become a power surplus nation(In USA this would be shortly put into practice as new laws have made energy efficient lamps mandatory).Ultimately a high price of crude would be the best solution for the rising CO2 levls and global warming.
Please read the article Remembering Richard Nixon by Krugman in New York Times.He writes"And what about other challenges? Every desperately needed reform I can think of, from controlling greenhouse gases to restoring fiscal balance, will have to run the same gantlet of lobbying and lies."
Pickens and other persons belonging to the haves are deliberately painting doomsday scenarios to mislead the general public and put hurdles in the path of reforms in USA so that Reaganomics again flourishes there which would be an unmitigated disaster for the world



Aug 31, 2009

What according to Mark Faber is when he says Gun?!. Farm is understood.

thank you


P.Sai Babu

Aug 31, 2009

Another crude shock on the way?---
well there could be one if uncontrolled speculation on the NYMEX exchange is not curbed. Let us not forget that the earlier rise on crude oil prices was triggered by greedy U.S speculators due to which their economy was the worst victim even though the Asian economies were put to certain amount of strain.Coupled to this the reckless U.S bankers actions contributed to the rise in housing rates to diggy heights & by lending to the people who just don't have resources to pay the EMIs they put themselves in banruptsy.

Let us analyse the events when crude oil rates rose to $147 per barrel. The U.S was urging Saudi governmnt to raise oil production to curb rates whereas in reality there was no extra demand to warrant such enhancement of production and in fact Saudi government informed them so.

But the way the U.S economy is managed we may not be surprised about another crude oil shock & next time if it happens, then it will be more cruder than the earlier one particularly to U.S as they are the major consumers.

By the way how long U.S can police & control the world economy without resorting to defecit budget & huge borrowing.

Sai Babu


prof. subin chandran

Aug 31, 2009

The Crude oil hike:-
In 2004 crude soared 53% ($36 to $55) in only 4 months, then fell -27%.

In 2008 crude soars 59% ($85 to $135) in only 4 months, then fell -76%.

In 2012, crude will be soaring 65%[$138 to $218/b] in only 4 months & fell to -125%.

Major implications are: Food inflation, fuel hike,Transport Hike, Cost of Production increases. the best stocks are cairn india ltd; essar oil, praj industries etc. thanks


kenneth abreu

Aug 31, 2009

Excellent writeup. Very informative and educative. Write something on the sensex going forward.



Aug 31, 2009

I do not think thereis any thing wrong in selecting priority for UDI distribution.We have democracy and one can give free comments, but calling the PM as spineless
for this comments seems to be uncalled for. Nandan has sacrified his job and accepted this task for national cause. We should refrain from making such comments.
Our PM is the most qulified man in the world and Nundan the most dedecated person.

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