Even Opec sources confirm that they did not expect consumption to fall so drastically during the past two months. The first factor is worsened by the jettisoning of oil by most tankers which were floating with oil cargo during March-June, confident that soaring oil price would generate more profits than what they would earn as freight charges. When the slide in oil prices began towards end July, tankers began jettisoning their cargo, adding to oil reserves. This caused tanker freight charges to fall though, as Khatau clarifies, oil tanker charges did not fall as steeply as did the Baltic freight indices (which reflect dry cargo shipping, not oil and gas tankers).
There is another reason why the production cutback may not work this time. Contrary to popular perception that Opec did everything to maintain supply during the oil price climb of 2007 and 2008 (when oil prices were soaring every week), freshly available data shows that Opec did try and reduce production even then (see table). That did help inflame speculators and flare up prices for some time. But that strategy did not work for too long.
Almost every Opec member country reduced production in 2007 (over 2006) and in 2008 (annualized). Add to this the reduction in production by countries such as Mexico (which is not part of Opec) and this number is likely to swell further. A notable exception was Iraq, where pumping stations were under the supervision of the US Army. Iraq increased production by 7mt in 2007 and is expected to register an additional increase of another 13.5mt in 2008 (over 2007 on an annualized basis). High oil prices encouraged many countries to increase their own output and make more oil profit. A big beneficiary was Russia, which not only seized control of oil fields from its oligarchs (and private investors) but also pushed up production from around 480.5mt in 2006 to 491.3mt in 2007—a whopping addition of 10.8mt. (no figures for 2008 are available yet). In fact, oil profits allowed Russia to pay off most of the debts from its 1998 financial crisis. And, as the BusinessWeek points out, “It also built up a $560 billion in reserves and an additional $160 billion in two sovereign wealth funds financed from oil taxes.”
Moreover, given the acute global recessionary trends visible all over the world, marketmen wonder if many countries will be bold enough to cut back on oil production in the coming months. If not, Opec’s decision could remain ineffectual.
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Deficit financing defies logic
Deficit financing in India has begun to worry many economists.
While finance minister P. Chidambaram tries to glibly explain this away as being due to a global downturn, the fact remains that the government has been profligate in its spending.
Losing out: An oil platform being constructed for ONGC. Some of its most lucrative oilfields were given away almost 15 years ago to favoured firms under the first phase of the New Exploration Licensing Policy. Santosh Verma / Bloomberg
More worryingly, this deficit does not include almost Rs2.5 trillion (figures vary from Rs2 trillion upwards) subsidy that the oil companies have notched up thanks to government policy.
Oil bonds have been kept out of this deficit figure. Add this figure and the picture becomes even more alarming.
According to Fitch estimates, if all off-budget subsidies were accounted for on-budget, the general government deficit would approach 9% of gross domestic product (GDP) in 2008-2009 (FY2009).