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Oil prices, food shortage and more... - Views on News from Equitymaster
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  • May 23, 2008

    Oil prices, food shortage and more...

    The days of 'cheap' oil are gone
    Goldman Sachs' prediction of crude oil prices touching US$ 141 in the second half of 2008, on constraints of production and a lack of substitutes, has come true as the commodity's prices spiraled up nearly 14% in the past few weeks. The securities firm has further forecasted the prices to move up to the levels of US$ 200 per barrel. What assumes importance here is that the cheap dollar (rupee dollar exchange rates) that had sizeably guarded the cost of crude oil prices for Indians has also become dearer.

    The recent depreciation of the rupee against the dollar has caught the regulators off-guard, although the Reserve Bank of India RBI seems to be in no mood to intervene in the foreign exchange market. There are three key factors behind the recent depreciation:

    • Recovery of the US dollar vis-a-vis global currencies;
    • Higher global crude oil prices, which widen the current account deficit and also increase dollar buying by oil companies and
    • Slowdown in capital inflows, which decreases the supply of dollars.

    Surging crude oil import bill, continued strength in domestic demand and expectations of moderating export growth suggest that the current account deficit will worsen this fiscal year, probably to slightly more than 2% of GDP. The thumb rule suggests that a US$ 10 per barrel increase in crude oil prices increases the merchandise trade deficit by around US$ 7 bn.

    Oil giants such as Exxon Mobil, Royal Dutch Shell, Chevron and British Petroleum will spend a record US$ 98.7 bn this year on exploration and production, more than quadruple the amount eight years ago. The supplies they tap from non-OPEC countries is expected to meet only about 20% of world demand growth over the next four years. The struggle to find oil coincides with a boom in demand from places like China and the Middle East, where it will rise 4.9% this year, making up for a drop in demand from North America and Europe.

  • Impact of high oil prices

    Food shortage? Blame it on biodiversity
    The UN Convention on Biological Diversity will review goals set at the 2002 UN Earth Summit, which called for slowing the loss of biological diversity by 2010. The target though may seem out of reach given the growing human population, rising pollution levels and climatic changes. The spike in the cost of petroleum products has impacted the prices of fertilizers and processing agents, not to mention the use of soya, sugarcane and other food products to produce ethanol, a substitute for petrol. There has also been an increase in the price of grain, which is used to produce biofuels and fed to livestock to satisfy a growing demand for meat in developing countries. Thus, while the lack of foresight in terms of investment in agriculture is certainly to blame, there are several other factors that have impacted the ecosystem and have brought the crisis to alarming levels.

  • Global food crisis

    'Micro-hoo' - not in the making
    Microsoft Corp is no longer looking to bid to buy the entire stake of Yahoo Inc but is in talks about other types of collaborative deals. Earlier this month, Microsoft walked away from a proposal to acquire Yahoo for US$ 47.5 bn, or US$ 33 per share, after Yahoo refused to settle below US$ 37 a share. Microsoft has now made an alternative offer, proposing to buy Yahoo's search business and take a minority stake in the firm. Should a deal fructify, it would forge an alliance between the two companies that would represent an alternative means of competing with rival Google, which has monopolistic presence in the global search engine business.

  • Google's reaction to Microsoft's bid

    China's energy-quake
    As the death toll exceeds 70,000 and the Chinese government prepares to provide food to millions of refugees, there is another tremor that is likely to hurt not just China's but also India's economic growth. Hardest hit by the recent earthquake in the neighboring country has been Dongfang Electrical Corp., whose Sichuan-based subsidiary Dongfang Turbine, China's largest turbine producer, was virtually wiped out. Sichuan, the worst quake-affected region, is a major onshore gas producer and the country's largest hydropower generating region. The quake's destruction has affected natural-gas exploration and production and in turn hit hydropower generation (Sichuan's electricity grid is currently running at 76% of pre-earthquake levels).

    China can ill-afford severe disruptions to the gas and hydro-power industries, which are vital to fueling the country's double-digit GDP growth. Sichuan supplied some 27% of the country's national gas production in 2007. While natural gas still only accounts for 3% of the national energy mix, China plans to raise that proportion to 10% by 2020, with Sichuan's rich reserves playing a key role in that expansion.

    At the same time, India's ambitious plans to quickly ramp up its critical power capacity took an unexpected hit because a lot of equipment orders placed by the Indian power project developers from China have been affected by the quake. India has been leaning on Chinese power equipment makers not only because shipping the goods from its neighbour is quicker and more cost-effective, but also because the equipment is priced more competitively than other suppliers such as the Europeans. Power equipmnt manufacturers in India are struggling to execute projects with their own order books bursting at the seams.

    Dongfang has a manufacturing capacity of 31,000 MW per year. It routinely bids for contracts for setting up power-generation stations and has taken up power project contracts in more than 10 countries. India has drawn up plans to generate 78,577 MW of power in the next five years and has farmed out orders to other overseas suppliers as well. Equipment for about 20,000 MW has been ordered from Chinese firms such as Shanghai Electric and Harbin Power, but nearly 40% of the order is sitting with Dongfang.

  • Opportunities in Indian power sector



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