India: The Price of Oil and Politics vs. Economics

by: Equitymaster

Oil prices fell below US$ 70 yesterday. That brought some cheer to the beleaguered US stock markets. Not so for the oilmen on the other side of the globe. The Organization of the Petroleum Exporting Countries [OPEC] has called for an emergency meeting next week to stabilize the falling crude prices.

It may be noted that the commodity has tanked nearly US$ 40 a barrel in the last three weeks. The main reason for the recent decline is the indication that demand for energy will slide along with the slowing world economy. According to the US Department of Energy, US crude oil inventory has risen sharply as Americans are now driving less thus consuming less fuel. In fact, natural gas prices have also slumped from their peak of nearly US$ 14 per thousand cubic feet [TCF] to lower than US$ 7 per TCF.

We believe lower crude prices bring much needed elbowroom for the economies around the world to build the foundation for the next round of real growth. However, the oil producers must be scratching their heads. After all, crude price levels form an integral part of long term planning for projects and research on emerging technologies.

Jet's retrenchment plan crash lands
In what resembled a late night soap opera, Jet Airways yesterday reversed its decision to lay off 1,900 employees in the face of mounting political pressure. The company's chairman, Mr. Naresh Goyal, said he was unaware of the reasons for the sacking. The company's top management had independently taken the step to cope with adverse financial conditions. Apparently, the chairman was under no pressure from anyone to reverse the decision.

No doubt, the entire episode was handled rather shabbily by the company and it's perhaps time that Indian corporates stopped digging pits for themselves. But we wonder if this is another instance of the triumph of politics over economics all over again. If India's real economy - steel, power, automobiles, aviation etc. - has to rise beyond its current abysmal standard, corporates and politicians need to take a hard look at how they engage. As things stand currently, companies are completely at the mercy of politicians of all hues.