Monday, September 15, 2008

Oil price fluctuations

I was going through a blog the other day and read one of the posts where the author takes MMS into account for claiming in his 15th August adress to the nation, that the current inflation crisis was caused due to oil price hikes. The author's reasoning was something like this. Oil price hikes leads to different price levels decided by the market. Inflation however is a result of the amount of money in the system, which is controlled by MMS and his stooges in the RBI. So MMS was lying. Now I hate MMS and the party he represents as much as the next bloke, but somewhere I felt the blame was a tad too harsh. If the price level has nothing to do with inflation what has? No doubt MMS and his merry minions would have exacerbated the inflationary pressures on the common Indian by short sighted monetory policies, but I do feel like MMS does, that the lead to all this originated somewhere in the middle east!

This current inflationary crisis was caused due to the increase in oil prices, make no mistake about it. The government was implicit in aggravating the crisis by taking a short term view and increasing the money supply in the economy. But did it have any other option? Taking a stand against this price hike would have meant a hit on the GDP growth and employment. An outcome that would have spelt disaster for its impending election campaign. Also, the courage to resist increasing the supply of money to counter the OPEC proclivities to raise oil prices by significant percentages intermittantly, would have been effective only if it was a concerted effort of all oil consuming countries. Something unlikely to happen. So effectively the sheikhs of the OPEC have managed to get a tight grip on our proverbial balls. And whenever they squeeze, our GDP will fall, while unemployment and inflation will rise.

Unless we manage to develop alternate sources of energy to the level where they can be effective substitutes for oil, or take over all the oil fields of the world and distribute their ownership amongst countries in proportion to their population (a socialistic solution to a capitalistic bottleneck anyone? China.. anyone?? greater good anyone???), we will be held hostage to OPEC policies. That is why at some levels the Iraq war, and threats to Iran do serve as signals to oil producing nations that their oligopolic market policies can result in unmarketlike reprisals. It would only be a matter of time before other oil starved nations like China, France etc would undertake their own wars on terror.

At a personal level though I am anxious about the next salary hike, and am calculating what level would be a true reflection of my own productivity growth with inflation arrears for the current year and inflation expectations for the next year considered. This rent seeking activity (anxiety and unnecessary calculation) would undoubtedly have negative impact on our real GDP growth next year. For that I apologise to my countrymen.



Anonymous Anonymous said...

Huh! i thot ur Eco reading was over :O

11:01 AM  
Blogger Soma said...


3:57 PM  

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