The solution…………………………………..

To be honest even I don’t know what the solution to the problem I posted is.  As some people have said that I should only go on and give the solution. So here  I am doing some loud thinking which might result in something gibberish, but I dint name the blog Financial Gibberish for nothing (I have the liberty).

The first and the most obvious point is to build more reserve capacity which I guess has already started as the oil ministry has proposed to built a capacity of 1.33 million metric tons at Visakhapatnam on the east coast. The nation’s storage capacity will rise to 5 million tons when two more terminals are built at Mangalore on the west coast by 2012. That’s equal to two weeks of current imports. Still we require more such capacities to be built as a 60 days reserve will serve as a decent cushion considering India’s dependence on oil imports. I would also like to stress on the point that these reserves will help in times of such geopolitical issues where supply could be interrupted.

The other serious issue which needs to be addressed is the liquidity part. The oil imports suck out the liquidity in the Indian markets, as to buy oil the oil companies have to pay in dollars which they get in exchange of rupees. Consider the present situation of our banking system, we are somewhere in the negative Rs.80000 Cr to Rs.1 lakh crore when it comes to liquidity on a daily basis. Imagine what impact huge oil imports will have on this present state, the imports will not only be very expensive but the call rates, volumes in the LAF window and bond yields will jump significantly in order to fund the oil companies. The solution to this is open for discussions as I have no clue at the moment.

The only suggestion I have is that oil companies should not buy oil from the spot market so frequently and should book commodity futures/forwards in the international market (which they are allowed to book with a bank) and hedge the currency risk with a forward (again this is allowed to them with a bank). I have been told by many bankers that corporate usually don’t book oil forwards forget hedging the exchange risk by booking usd/inr forwards. The reason which they usually give is what if the crude prices fall in future and we would have locked in a higher rate.

One can just hope that someday sensibility will prevail.

Middle East - A complication for the existing structural issues of India

The trouble in the Middle East which has most of the OPEC countries in the belt is a potential threat to India, that too in a much more significant way than any of the developed or emerging economies. The international crude oil market has already factored in the distress in the Middle East countries.

The problem for India is not only that they are the 8^th largest net importers of oil (1,200,000 barrels per day), but 21^st when it comes to oil reserves. The steep rise in international crude oil prices not only means havoc for the Indian Oil Marketing companies but the countries fiscal health as well. Currently the OMC’s (Oil marketing companies) in India are losing 1 lakh crore by selling petroleum products at subsidized rates. The government has decontrolled petrol prices which already is fuelling inflation amid rising food inflation and a strong need is felt to decontrol diesel prices otherwise another subsidy burden awaits the government.

All said and done the problems in middle-east might ease out in sometime but it will be pretty optimistic to think so, in such events any country who has a reasonably good oil reserve will not face as many issues as a country like India which runs to the spot market every now and then to buy oil. The U.S has been able to increase its strategic crude oil reserves to a decent 60 days of storage where as India has been forced to buy spot at peak rates due to low strategic storage capacity of its refiners and stockist. Of late, India has started building a grossly inadequate strategic crude storage capacity of two weeks compared to the 60 day storage capacity of U.S and 90 day capacity of Germany and France. Even China which is at times inappropriately considered India’s peer has embarked on a project to store 90 days of oil by 2020 to meet its energy security.

The solution…………don’t we all know that.