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