Why Crude Oil Prices are Falling ?

Crude Oil prices are falling at a very fast pace. The prices have eroded by 50% in past one year which is causing a lot of disruption in global economy. Some of the countries like India who are dependent on imported crude are benefitting out of it and producers like Iran and Russia are bleeding due to reduced prices.

There may be multiple reasons for the fall in crude oil prices. Some of the reasons which I feel may affect the pricing are below stated but the real reason may be very different.

 

Theory X

Reduced Oil Demand in Future:  The current price is the reflection of the future demand which has reduced due to poor health of global economy. The reduction in demand is may be result of cooling of Chinese economy, uncertain Europe and other countries. At the time when anticipated demand was reducing US opened flood gates of the Shale Oil. The prices started falling as soon as the US Shale Oil production started to increase and it started competing with crude oil from the crude oil supply from OPEC.

The theory fails to explain why the prices will fall as much as 50% as conditions are still better than what the world has already seen. Infact when US is growing at 3.5%, the size of US growth can provide fillip to the international demand and can absorb some of the supply. Why OPEC didn't reduce its production when the demand was seen to be lower like it usually do to support the price in the market ?

Theory Y

USA counter strategy for Iran and Russia: Both Iran and Russia who do not share very good relations with USA are largely dependent on the sale of crude oil to sustain its economy. The price reduction will hurt them the worst. It also suggests that wars between the country will increasingly be more economic than traditional. The theory has its merit and demerits, the shale oil production is largely held private in US and works based on economies. So it may not be the government who is driving the production.  OPEC could also have reduced the production but it never went for it.

Likely Reason

Technology: For years together the world has been dependent on crude oil and coal for its energy need. There may be some new technology which is about to enter the market which both USA and OPEC is aware. The technology can be Solar or other rewnable energy which can even change the pecking order of the economic strength of the countries. Once such a technology comes, the oil fields will be worthless and it makes sense both for USA and OPEC to pump out as much oil as possible without worrying about prices till such a thing happens.




 

Nursery Admissions in Delhi..

In the last blog I was comparing the ease of admissions in good Engineering colleges of India and USA, now take a look at even tougher admissions, admissions in Nursery for Delhi kids.

Their is again a huge demand supply mismatch of good schools in Delhi inspite of good efforts by the government . Their are more number of children running for fewer seats and the competition is breathtaking. The admissions committee of nursery schools devise a 100 point system for admissions and the point allocation varies from one school to another.

So the first step for parents is to fill the forms for various schools and they will be awarded points on various parameters which often looks absurd to me. The common criteria are : -

1. Alumni : If any of the parents have been alumnus of the school they will get 5 to 10 points . Now is it the mistake of the kid if his parents are uneducated or were not brought up in Delhi.

2. Neighborhood :- It is again a most important criteria and nearly 20-30 marks are allotted to it. This criteria makes lot of sense as without it the ambitious parents will try and put their kids in far located or may be best schools putting pressure on both the child and the traffic of the city.

3. Girl Child : If the candidate is girl, she will be awarded 5 to 10 points which varies from school to school. Now its good to encourage girl child education but is it the fault of the young boy or his parents if he is a boy ?

4. Sibling : Delhi school wants sibling to study in same school and provides extra points for it which makes it tougher for first kid or parents who wants just 1 kid.

5. Single Parents : Single parents are given 5 to 10 extra points.

6. Your views on Education System : This is a qualitative analysis of your thought process based on which the parents are awarded points..

One of the welcome moves has been the removal of extra points for the parents education. It has not been taken very well by the elite class of Delhi but I fully support it and even believe that uneducated parents can even be given few extra points to educate their wards.

So after the shortlisting of children based on points its the interview round, previously there used to be interview of the candidate (Kids! ) but now it has been abolished by the government ,we still have interview of the parents . There are FAQ of the same which lot of parents are reading and preparing for it these days .. the day is not far when we have classroom coaching for the same..

T are parents who gets zero points out of the this point system, does it means that there children are not worthy of good education ?

College Seats.. Demand and Supply ..

Just got hold of the data of selection rate (Engineering Courses ) in Top US Universities , courtesy app2us.com

1 Massachusetts Institute of Technology 23.5%

2 Stanford University 28.0%

3 University of California Berkeley 20.4%

4 Georgia Institute of Technology 36.8%

5 University of Illinois–Urbana-Champaign 19.2%

6 California Institute of Technology 13.1%

7 Carnegie Mellon University 21.8%

8 University of Southern California Los Angeles 46.6%

9 Cornell University 19.8%

9 University of Michigan–Ann Arbor 36.4%


If you compare it with Indian universities, getting admission is far tougher. To get admission in IITs one has to be in top 2% even after massive increase in intake of IITs. Needless to that there is supply crunch in this sector.

Indian Entrepreneurs tried to tap the opportunity by opening lots of new colleges and universities but the quality and infrastructure, education, professors is still lagging behind in most the new colleges. I believe next 7-10 years will see massive capacity creation of institutes with good education and infrastructure . It might come from Indian Business houses or foreign universities setting up their colleges in India to reduce the large gap in demand and supply of good educational institutes.

The issue of supply of good professor is one factor which might trouble the growth of the industry and it might lead to massive increments in the salaries of Professors.

Filthy Rich

What will you do when you have tons of money, Mr Raju is reported to have 1000 designers suit just for himself, which can make even the likes of Amitabh Bachhan feel jealous, but the big question is - Why do people like Raju spend millions on designer suits and accessories when it will take him atleast 3 years to repeat the usage of the earlier used one. Some of the reasons might be:-

1         Exhausted with other options of burning money

2         Marginal utility of saving money gets reduced drastically

3         Safety from detection of excess Black money

4          Have to fill up the expensive and fancy Wardrobes

5         To attract attention of fairer sex

6         Improving the demand and state of economy

7         Use it as a sign of immaculate taste

Want to know the real reason, get Rich.

Saving Tax Payers Money …

Today I was really amazed after reading a news item “Recession Squeezes Jails “on a popular website. It says that USA houses almost 2.4 million people in its prisons. It’s an astonishingly high figure, close to 1% of the population of USA is behind bars. If we have similar statistics in India it will be like more than ten million people inside the jails.  But American prisons are lot better than what we have in India as they have better facilities for recreation inside the prison.

I also found out that American government spends close to $30,000 per person in prison in one year. That’s around ten times of the per capital income in India. So America is spending nearly $ 80 Billion of money out of the tax payers pocket in maintaining the prisons.  

If USA sends all its prisoners to developing countries where they are provided with same quality of life and recreation, it can easily be done by spending one third of what is being spent in USA today and the remaining money which will be as high as $ 50 billion can be used in other development work.

So how does this new idea of outsourcing sounds ?

Risk of Globalization !

In my Last 2 years of MBA, I’ve heard people from all kinds of industry and profession, one consistent view put forward by all of them – Globalization is the best thing which can happen to the world. We gain from trade, the dependency on other economies even reduces dangers of War and destruction, the economies should open up and trade more freely than ever.

Even in economics ‘ The Theory of Comparative advantage ‘ by Mr David Ricardo states that a nation should  produce what it is good at and import rest from other countries of the world . Most of the economics taught in business school is pro globalization and as long as it was working nobody was even questioning it.

Aren’t we compromising on the process of diversification by excessive globalization? When all the economies go burst simultaneously the compounded effect becomes a much bigger demon than we can handle. Sub Prime crisis with the origination is USA is now hitting even the poorest of the poor country which is connected to the globalized world. The confidence of the industry had denigrated to such a level now that even when a particular company is doing well they are not taking risk of entering into fresh projects.

Look at the way over rural economy is doing, the consumption pattern is intact as these people don’t know much about recession or subprime crisis .For them the world is still the same and they still face the same credit crunch and pay higher interest rates as they used to do in boom times. It is this rural economy which is slightly diversified and not directly connected with the globalized world which is driving the demand in India and may bring it out of trouble.

Globalization can be really good if we can devise a mechanism which can restrict the amount of damage to the significant lesser part of the globe.

Is the Subprime Crisis Over!

Yesterday my friend told me that he has heard that “Subprime crisis is over “ and it is this news which is making the Sensex go up. I was really puzzled hearing it and started laughing after that.

 We all know that subprime crisis is far from over , but who will declare it once it is over , what is the methodology and procedure to actually verify if someone says its over .These  financial crisis are so huge and affect so many economies , even to find the real impact of them is so tough . During Asian Financial crisis of 1997, it took many years and many declarations by prominent leaders of financial community to make the markets believe that the crisis is over.

I hope my friend is right and we see a better managed financial world past subprime very soon.

Some companies should be allowed to go Bankrupt..

Bankruptcies are normally associated as terrible news, something which disturbs the whole system and causes lot of unemployment. The biggest setback a bankruptcy causes is the lost of trust, the whole credit crunch situation has arisen due to this lack of trust among financial institutions to lend to each other. Year 2008 has seen all kinds of bankruptcies; some of them like AIG were saved by the timely bailout packages announced by the state while some were not fortunate enough.

As the company were going bankrupt so were the people of USA, as per a estimate the number of people filing bankruptcies in USA has exceeded I million in 2008 .

 But not everything is bad in bankruptcies and it is actually an integral part of the system. In case the company files bankruptcy it goes to the court of law where it is either liquidated or restructured based on the type of filing. Some companies should be allowed to go Bankrupt due to the following reasons: -

1.       Survival of the fittest: - If some product or service is not required in a certain scenario, than its best to shut down the shop rather than pumping money to keep it on artificial oxygen. It gives way to better technologies, keeps the research and development department on toes to improve upon the existing products.

 

2.       Reduces Inefficiencies: - Incorporating a company is easy but running it efficiently requires planning, implementation, technology and management. If any of it is missing, it’s better that the one who is more capable takes over. A recession actually removes lot of inefficiencies from the system which were developed due to excess demand.

 

3.       Fights Moral Hazards: If the government just keep saving all the companies from bankruptcies, it will create a moral hazard of lax regulation and control.

 

4.       Risk Management: - The stake holders learns a lesson of risk and return, otherwise everyone will take more risk to maximize returns. The risk management of the company should be properly thought of before taking critical decisions.

 

5.       Lax corporate governance: - Many a time in cases of bankruptcy, the corporate governance is the major issue. The management bonuses and salaries should be in line with average and should be appropriate as per the current financial condition of the company.

Are we heading towards Great Depression?

Among all the talks, predictions and doomsday theories propagated by the economists, people of this era are going to be more financially literate than any of the generation in the past. The way India has come on the global scene , our markets unfortunately got coupled with the global economy and the crisp reporting of issues done by newspapers, nobody can ignore global cues anymore. 

One of the current debates is “Are we heading towards Great Depression “. If we analyze both the scenarios,there are actually lot of similarities between the great depression of 1929 and Sub Prime Crisis the world is facing today. The prominent similarities include the similar crash of asset price including housing and stock markets, defaults by Banks, global nature of crisis, movement of prominent economies away from capitalism, likely increase in taxes by USA in times of crisis etc. If you see the similarities the chances of subprime turning into depression are indeed very threatening but on the brighter side the intensity of the economic downturn is much lesser this time than in 1929. If we actually see the stages of great depression, it started with black Tuesday (Oct 29, 1929) when the markets crashed heavily .The reason being high level of public debt caused by destructive WW - 1and reduction in income which was leading to defaults of loans by people . But economy recovered again in 1930, the next phase of downturn which lasted for few years was even more severe. The prime reason for it was seen as low investor confidence. People wanted to stay away from financial markets and institutions to avoid any future financial problems. Demand for goods and service dipped because of that and it lead to massive crisis. Comparing it to the present scenario where we have high inflation in half of the world countries, robust demand for products and services, the fundamentals of the economy are not that bad. There may be slight downward pressure on the demand in US but still most of the countries have good demand and people still have lot of confidence about the strength of the system. 

Certainly the lesson learnt by the great depression are helping central banker in facing the situation. They are pumping huge money in the system to bring back the liquidity and investor confidence. It will help in reviving the state of economies.

On a lighter note, one of the popular Jokes now days on internet is ‘Q - What the difference between recession and depression? , A- Recession is when your neighbor looses a job and depression is when you lose your job! ‘