The fuel favour year for India

The US$ per barrel (red line) and the rupee-dollar exchange rate (green line) are plotted to the left scale. The rupee per barrel (blue line) is plotted to the right scale. I have used data from the Petroleum Planning and Analysis Cell of the Ministry of Petroleum and Natural Gas – the global crude oil price of the ‘Indian Basket’ in US$ per barrel.

It started in early August, the extraordinary slide in petroleum prices. Until then, the international crude oil price of the ‘Indian Basket’ (of crude oils, as it is called) had swung between US$ 110 and US$ 105 per barrel.

The rupee-dollar exchange rate, and the effective price of a barrel of crude oil in Indian rupees (both measures also appear on this chart), fluctuated but little for most of the first half of 2014. In early June 2014, the rupee-dollar rate turned around from 59 and has been rising since, while in early July the rupee price per barrel descended from its plateau of 6,300-6,600 and has been dropping since.

The cost of oil-derived energy has had a number of effects upon our everyday lives in the second half of 2014. It has helped the new NDA-BJP government during its first year by dampening overall inflation (the consumer price index) and particularly food price inflation. This has been particularly fortunate for the NDA-BJP government as the deficient monsoon of 2014 has meant a drop in the production of food staples, and market forces being what they are, food price inflation especially would have been well into the 13%-14% range (last quarter 2014 compared with last quarter 2013).

Galloping consumer price inflation has been forestalled by the plunging price of crude oil. The data I have used for this startling chart is courtesy the Petroleum Planning and Analysis Cell (PPAC) of the Ministry of Petroleum and Natural Gas which computes several times a week the “global crude oil price of Indian Basket in US$ per bbl” – which means the average price we pay per barrel for the various kinds of crude oil we purchase.

A barrel of crude oil is 42 gallons or around 159 litres. This crude, when refined, is turned into diesel, petrol, lighter fuels, feedstock for the manufacture of various plastics, and other products. Typically, up to 70% of the oil we buy is converted into diesel and petrol (and carbon from all those exhaust pipes). Also typically, a barrel of crude oil (which is an extremely dense form of packaged energy) contains around 5.8 million BTUs (British thermal units). More familiar to us is the kilowatt hour (or kWh) and these 5.8 million BTUs are about 1,700 kWh – at current national average rates of per head electricity consumption this is worth about 26 months of electricity!

From early August till the end of December the price we paid for a barrel of crude has dropped from around US$ 103 to US$ 54 and correspondingly (factoring in the rupee-dollar exchange rate) the rupee price of a barrel of crude has dropped from 6,300 to around 3,500. Put another way, the INR 6,300 we paid in early August for 5.8 million BTU could buy, in mid-October 7.1 million BTU and by end-December, 10.4 million BTU.

Most of us tend not to be profligate with energy (our electricity comes mainly from the burning of coal, but the sale of automobiles has continued at a steady pace, or so the industry tells us). The question is whether this windfall energy saving (in terms of petroleum energy units per rupee) has been well used by the sector that can spread the benefit the most – agriculture and food. It will take another three months to judge, and we will keep a wary eye for the next quarter on the Indian crude oil Basket.

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Retiring the American dollar

Off into history’s sunset, like the cowboy. This image (modified) is called ‘Dollar Green’ by the artist mancaalberto (http://mancaalberto.deviantart.com/)

Seventy years ago, to the very month, a man named Henry Morganthau celebrated the creation of a “dynamic world community in which the peoples of every nation will be able to realise their potentialities in peace”. It was the founding of what came to be called the Bretton Woods institutions (named after the venue for the meeting, in the USA) and these were the International Bank for Reconstruction and Development – better known as the World Bank – and the International Monetary Fund.

None of the lofty aims that seemed so apposite in the shattering aftermath of the Second World War have been achieved, although what has been written are libraries of counter-factual history that claim such achievements (and more besides) commissioned by both these institutions and their web of supporting establishments, financial, academic, political and otherwise. Instead, for the last two generations of victims of ‘structural adjustment’, and of ‘reform and austerity’ all that has become worthwhile in the poorer societies of the world has been achieved despite the Bretton Woods institutions, not because of them.

Now, seventy years after Morganthau (the then Treasury Secretary of the USA) and British economist John Maynard Keynes unveiled with a grey flourish a multi-lateral framework for international economic order, the Bretton Woods institutions are faced with a challenge, and the view from East and South Asia, from Latin America and from southern Africa is that this is a challenge that has been overdue for too long.

Let’s get the de-dollarisation of the world started.

It has come in the form of the agreement between the leaders of five countries to form a development bank. Russia’s President Vladimir Putin, China’s President Xi Jinping, India’s Prime Minister Narendra Modi, Brazilian President Dilma Rousseff and South Africa’s President Jacob Zuma made formal their intention during the sixth summit of their countries – together called ‘BRICS’, after the first letters of their countries’ names – held this month in Brazil.

What has been set in motion is the BRICS Development Bank and the BRICS Contingency Reserves Arrangement. Both the new institution and the new mechanism will counter the influence of Western-based lending institutions and the American dollar, which is the principal reserve currency used internationally and which is the currency that the IMF and the World Bank conduct their ruthless business in (and which formulate their policies around, policies that are too often designed to impoverish the working class and to cripple labour).

At one time or another, and not always at inter-governmental fora, the BRICS have objected to the American dollar continuing to be the world’s principal reserve currency, a position which amplifies the impact of policy decisions by the US Federal Reserve – the American central bank – on all countries that trade using dollars, and which seek capital denominated in dollars. These impacts are, not surprisingly, ignored by the Federal Reserve which looks after the interests of the American government of the day and US business (particularly Wall Street).

In the last two years particularly, non-dollar bilateral agreements have become more common as countries have looked for ways to free themselves from the crushing Bretton Woods yoke. Only this June, Russia’s finance minister said the central banks of Russia and China would discuss currency swaps for export payments in their respective national currencies, a direction that followed Putin’s visit to China the previous month to finalise the gigantic US$400 billion deal between Gazprom and China National Petroleum Corporation (CNPC). It is still early, and the BRICS will favour caution over hyperbole, but when their bank opens for business, the sun will begin to set on the US dollar.