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What do crude prices tell us? - Views on News from Equitymaster
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  • May 13, 2009

    What do crude prices tell us?

    Crude oil prices have shot up by more than 70% from their lows achieved earlier this year. The question remains whether this is due to an economic recovery, which gets reflected in increased demand for oil, or are investors getting ahead of themselves?

    There are a few positive indicators. As per CNNMoney, China's oil imports have increased almost 14% in April this year on a YoY basis. If the Chinese economy improves and US shows some signs of a revival, the upward trend in crude prices is likely to continue. Moreover, the relationship between the price of an ounce of gold and a barrel of crude, which historically has been around 15:1, had been distorted. Now, gold has stabilised while crude has bounced back to bring about an equilibrium.

    On the flip side, some observers believe that investors are parking their money in oil in anticipation of the inflation likely from the huge injection of liquidity in the form of the stimulus packages. In that case, the hike in crude prices could run ahead of the levels justified by the demand and supply for the actual commodity. If that happens, prices would eventually overshoot and hurt the possibilities of an economic recovery.

    Given the dependence of modern economies on energy, we believe that the crude oil prices will be determined by the viability of alternate sources of energy. Alternative sources will have to be successfully commercialised from limited experiments to convenient mass market usage. Otherwise, the long term trend of crude price will be in one direction - up.

    The sorry state of Urban India
    While 70% of the nation still resides in rural India, the urban centers are crumbling from overpopulation. As reported in the Wall Street Journal, 2 decades ago, India had 23 cities with a population of more than 1 m. Today, there are at least 41 such cities. 6 more are likely to soon join the list. In fact, as per the United Nations, India is expected to add 10 m people every year between 2000 and 2030 to its 5,161 cities. Given the dismal pace of infrastructure creation, cities are unable to handle this massive influx of migrant population.

    Megacities are not unique to India. But the situation is certainly more dire. Of the 100 fastest growing urban centers in the world, India has 25. China, in contrast, has 8 such cities. China is certainly a comparable nation in terms of population, but does a much better job of managing its infrastructure. It takes 10 years to get projects done even in a high priority city like Mumbai. Unless we get our act together and learn to execute our plans, infrastructure bottlenecks in India will keep dragging down its economic growth and ultimately, the quality of life of the average Indian.



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