Oil is too high. Oil is too low. Which one is bad?

The Pak Banker - - OPINION - Monika Halan

Ire­mem­ber a time not so long ago when the head­lines screamed oil, as they are do­ing to­day. But just six years ago, it was the fear of very high oil prices that was freak­ing out ev­ery­one. A re­source-guz­zling China was set­ting the oil, and com­mod­ity, mar­ket on fire, and in 2006, pre­dic­tions of oil bar­relling past $100 was mak­ing head­lines. Oil did break $100, got to $142 in 2008 and then sank to $32 the same year when the mar­kets col­lapsed, and then roared back to cross $100 two years later. To­day the re­verse is true-dooms­day fore­casts pro­ject oil at $10 a bar­rel, af­ter oil breached the $30 price last week. Some of the cur­rent end-of-theworld pre­dic­tions for 2016 rest on the col­lapse of oil.

We know that high oil prices are bad for In­dia be­cause we im­port over three-fourths of our oil needs and the oil bill makes up a third of the to­tal im­port bill. Ev­ery dol­lar rise in price means a big­ger hit on In­dia's forex kitty. So why the frown when oil prices are fall­ing caus­ing the im­port bill to go down? The worry right now is less lo­cal than global. The fall of oil below the long run av­er­age an­nual range of $20 to $40 a bar­rel, is about this be­ing a symp­tom of a world econ­omy fall­ing into re­ces­sion. A glob­alised world means that In­dia will not es­cape the con­ta­gion if the dooms­day pre­dic­tions play out. Though we're in a bet­ter place than where we were two years ago due to bet­ter fis­cal man­age­ment, there are wor­ries about the fall in oil prices caus­ing In­di­ans in the Gulf to lose jobs and hence hit the strong $70-bil­lion re­mit­tance pipe­line.

If oil prices are fall­ing and our im­port bill is giv­ing less pain, why is the ru­pee fall­ing? The last time oil prices were high, we were told that the fall in ru­pee was due to a larger im­port bill. As In­dia needed more dol­lars to pay for the oil, it sold ru­pees and bought dol­lars, re­duc­ing the value of the ru­pee, so why the fall now and should it worry us? The cur­rent fall in the value of the ru­pee has less to do with do­mes­tic weak­ness but more with the stronger dol­lar. My col­league Ira Dugal nails it when she writes (http://bit.ly/1VndK2E) that Rs.70 to the dol­lar is the new nor­mal and that it is not a bad thing. Re­mem­ber that In­dia is in a dif­fer­ent place fi­nan­cially than it was two years ago. A fall­ing ru­pee ac­compa- nied by a large cur­rent ac­count deficit (the ex­cess of the im­port bill over the ex­port earn­ings) is symp­to­matic of the weak­ness of the econ­omy. A fall­ing ru­pee when the cur­rent ac­count deficit is 5% of the gross do­mes­tic prod­uct (GDP) as it was in 2012, to when it is 1.3% of GDP, as it was in De­cem­ber 2015, are two dif­fer­ent sit­u­a­tions. The er­ror we make is to as­sume a strong cur­rency is a symp­tom of na­tional pride. Don't for­get, coun­tries de­value their cur­rency as a strat­egy to gain global mar­ket share. So, do we worry?

What should we be­lieve-that high prices are bad or are low prices bad? Should we worry about oil prices or about that darn leak­ing tap? We need to worry about the prices be­ing too high or too low, just as we need to worry about the sum­mer be­ing too hot or the win­ter too cold. The only ex­cep­tions are peo­ple whose liveli­hood is di­rectly linked to the value of the ru­pee or oil­ex­porters usu­ally cel­e­brate a fall­ing ru­pee and im­porters usu­ally cry. I try not to worry about things that I can­not con­trol. Like the weather. Or mar­kets. There's noth­ing you can do about it. So you just keep your­self hy­drated more in sum­mer and drink lots of hot wa­ter and rum in win­ter.

There is noth­ing you can do if gi­ant com­mod­ity cy­cles play out or gi­ant economies slow down. There is no in­di­vid­ual ac­tion that you can take that will mit­i­gate the ef­fect on your life. I'd at­tend to the leak­ing tap and leave the wor­ries for the hedge funds, the spec­u­la­tors, the reg­u­la­tors and those who look af­ter the coun­try's per­sonal fi­nances. As long as you have a skill set that has the ca­pac­ity to throw off an in­come and an ant-like habit of salt­ing away money reg­u­larly in a well di­ver­si­fied port­fo­lio, you don't need to waste your time wor­ry­ing about oil.

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