OPEC AND OIL PRICES

OPEC brings together most of the world's oil exporting countries to coordinate their petroleum policies and provide them with technical and economoical aid. OPEC was established in september 1960 at Baghdad,Iraq and was formally constituted by Iran,Kuwait,Saudi Arabia and Venezuela in 1961. OPEC was susequently joined by Qatar(1961),Indonesia and Libya(1962),Abu Dhabi(1967;membership was transferred to UAE in 1974),Algeria(1969),Nigeria(1971),Ecuador(1973) and Gabon(1975). The headquarters initially at Geneva was shifted to Vienna in 1965.

Today OPEC accounts for 40% of world's oil producton(In 1973 it was 55% and in 1980 it was 45%; the decline is due to increased role of Russia and Kazakistan). The supreme authority of the organisation is the conference consisting of reprentatives (generally oil ministers) of all the member states,each with one vote. It meets twice a year to formulate policies. All decisions (except those concerned with procedural matters)are adopted unanimously. The resolutions of the conference become effective 30 days after the conclusion of the meeting at which they are adopted,unless one or more members submit their opposition to the resolution.

However,an absence of effective coordination with non-OPEC oil producing countries has lead to much tensions in the world oil market. Four members-Kuwait,Qatar,Saudi Arabia and UAE-have large oil reserves in relation to thier population. The largest producer is Saudi Arabia, second largest being Iran.

OPEC decisions have been of great significance in the world oil market. OPEC gave FIRST OIL SHOCK to the world in October 1973(using oil prices as a political weapon against western nations for supporting Israel in the war of 1973).The organisation again raised prices to 130% in December 1973 and an embargo was placed on oil shipments to the US and Netherlands at the same time.

However,today condition is very different. Oil prices are going down like anything. It has reached below $34 a barrel (as in the third week of December 2008). The main reason of this is price cycle. First demand in western countries was huge(mainly in US which stands at no.1 position when it comes to oil consumption).However,OPEC kept on increasing oil prices. Then suddenly recession came into action and hence demand decreases,especially in western countries(this decrease in demand was due to the fact that people now want to spend less). As a result of decrease in demand, oil prices started coming down.

Recently,OPEC met in Oran, Algeria on December 17, 2008, and decided to cut 4.2 million barrels per day (mmbd) from their actual September production level of 29.045 for the OPEC subject to production quotas, effective January 1. This amounts to an additional cut of approximately 2.4 mmbd from the October production quota level of 27.308, and a cut of 2.9 mmbd from estimated November production, if the cuts are fully implemented.

While this is a somewhat confusing way to present their decision, the Algerian announcement would imply a new OPEC production goal of 24.845 mmbd from January 1. When combined with the October agreement, this latest cut represents a cumulative 4.0 mmbd decline from the September quota agreement, and a 4.2 mmbd cut (or 14.4%) in actual OPEC production from September levels. Non-OPEC producers Azerbaijan and Russia, who attended the meeting as observers with great fanfare, declined the opportunity to join OPEC and did not make a formal pledge to cut production and exports. Mexico and Norway declined to participate, saying that their production was already declining as a result of depletion.

OPEC is trying its best to increase world oil prices. However experts believe that oil prices are unlikely to go above $70 a barrel in 2009. Experts also believe that US President-elect Barack Obama’s stated policy of supporting development of alternate energy sources will also impact oil prices. At current crude oil prices developing alternate energy sources is no viable. But if the new US government subsidises alternate energy, and gives concessions, then companies will think about it.

Its difficult to predict anything with 100% accuracy. However world believes that countries like China and India have the potential to play some role in this context as demand for oil in these countries is constantly increasing. So this time not just OPEC, but India,China,Russia,kazakistan and many others have a major role to play. Lets hope whatever happen would be good for everyone.

GAME THEORY

Game theory is a technique for analysing how people,firms,and governments should behave in strategic situations and in deciding what to do,must take into account what others are likely to do and how others might respond to what they do. For ex-competition between two firms can be analysed as a game in which firms play to achieve a long term competitive advantage. The theory helps each firm to develop its optimal strategy for,say pricing its products and deciding how much to produce.It can help the firm to anticipate in advance what its competitor will do and show how best to respond if the competitor does something unexpected.It is particularly useful for understanding behaviour in monopolistic competition.

In game theory,which can be used to describe anything from wage negotiations to arm races,a dominant srategy is one that will deliver the best results for the player,regardless of what anybody else does. One finding of game theory is that there may be a large "first mover advantage" for companies that beat their rivals into a new market or come up with an innovation. One special case identified by the theory is the "zero sum game"where players see that the total winnings are fixed;for some to do well,others must lose. Far better is the "positive sum game" in which competitive interaction has the potential to make all the players richer.

CLEARENCE TO FOREIGN NEWS MAGAZINES

Foreign news magazines can now come out with Indian editions with union cabinet clearing an information and broadcasting ministry proposal to review the print media policy to this effect. Till now,only indian editions of foreign scientific,technical and speciality periodicals & journals were allowed. However,unlike in the case of niche publications like scientific,technical and speciality periodicals-where cent percent foreign investment is allowed,publishers of Indian editions of foreign news magazines will be eligible only for 26% foreign investment. Only Indian companies registered under the "Indian companies Act,1956"will be allowed to bring out Indian editions of foreign news magazines.

WORLD ECONOMIC CRISIS

The world is facing a situation close to that of 1929,if not exactly the same. Paulson proposed bailout package of $700 billion mainly to purchase toxic assets off the books of the financial firms. However the total consumer debt in U.S. is now about $2.6 trillion(22% more than in 2000),while the mortgage debt is around $10.5 trillion. The problem is that this debt will not be written off by bailout plan. The estimated credit default swap market alone is about $62 trillion. This poses a considerable danger.This is particularly the case as the major banks and investment houses now consolidate into 4 companies (J.P morgan chase,citicorp,Bank of America and Wachovia wells fargo). The toxic fictitious sector and the equally unstable consumer debt bubble are within the balance sheets of these 4 entities.The bailout does not address this toxicity,which will inevitably corrode the remaining banks.

This all started with sub-prime crisis,housing bubble and finally its effects on banks. On october 15 the federal reserve released the BEIGE BOOK which showed that in september consumer spending had declined in retailing,auto sales and tourism. This is the first formal indication of the impact of the crisis.Things are so bad that GENERAL MOTORS released a statement that"bankruptcy is not an option"for the company.

One of the main reason of all this is the complex structure of the U.S. economy,which gives extremly high profits to the financial sector. The number of bank failures in U.S. increased after 1980s;the savings and loans crisis was precipitated by financial behavior induced by liberalisation;and the collapse of long term capital management pointed to the dangers of leveraged speculation. Afterwards came the effects of housing bubble. Because of the complex chain,institutions at every level assumed that they were not carrying risk or they were insured against it. But risk did not go anywhere and resides somewhere in the system. Given financial integration,each firm was exposed to many markets and most firms were exposed to each other as lenders,investors or borrowers. Any failure would have a domino effect that would damage different firms to different extents and unfortunately the same happened.

FAILED BAIL-OUT PLAN

The house of representatives has deafeated a $700 billion emergency rescue package for staggering U.S.financial industry.The vote against the rescue was 228 to 205,with 133 Republicans turning against president Bush to join 95 Democrats in opposition.The bill was backed by 140 Democrats and 65 Republicans.The vote was a poloitical defeat for president Bush who tried to muster national support for a recovery plan in a televised address recently,then lobbied wavering Republican legislators in intensely personal telephone calls before voting.Bush and his economic advisors,as well as congressional leaders in both parties had argued that plan was vital to insulate ordinary Americans from the effects of wall streets' bad bets.The version that was up for vote was the product of marathon closed door negotiations on capitol hill.It is alarming,how quickly tables can turn.Leading U.S.commercial bank WACHOVIA CORP.which was looking to acquire MORGAN STANLEY till a few days back,has now ended up being swallowed by CITIGROUP.

ANOTHER FEATHER IN THE CAP OF RELIANCE

Reliance industries has begun crude oil production from the nation's first deep sea oil field in the krishna Godavari basin. Reliance is the first to produce crude oil in the private sector. It is also worth mentioning that Reliance is the only player in the private sector that owns oil refinery(at jamnagar),rest all are owned by government of India.

Difference between WTO and GATT

WTO had its origin in Bretton woods conference after the end of second world war. It was founded in 1948 with 23 members by the name of GATT[General Agreement on Tariffs and Trade]. But in 1995,GATT was rechristined as WTO.
DIFFERENCES
1.GATT was a provisional legal agreement whereas WTO is an organization with permanent agreements.
2.WTO has members while GATT had only contracting parties.
3.GATT dealt only with trade in goods while WTO covers services and intellectual property rights as well.
4.The real critical distinction between GATT and WTO is creation of a binding dispute settlement system.Under GATT contracting parties could bring cases before international body but there was no effective enforcement mechanism. But in WTO an effective enforcement mechanism exists.

CURRENT INDUSTRIAL POLICY OF INDIA

Industrial policy of any country is in the form of certain rules and regulations issued by the government of that country for all the industries. These guidelines need to be followed by all the industries of that country.
When India got independence in 1947, the policy makers were well aware of the fact that Indian private sector is in its infancy. So, they decided not to rely upon private sector for industrial development. Hence almost all the industries were kept under government control under the “Industrial policy of 1948”.
By the “Industrial policy of 1956” government divided industries into three categories, schedule A, B and C. Schedule A industries were exclusively under the control of state. It included 17 industries. Schedule B industries were setup by state but private sector could supplement the efforts of the state. Schedule C industries were left for Private sector but were under the strict control of the state.
Slowly and gradually government went on a nationalization spree with nationalization of general insurance, life insurance and finally nationalization of banks (14 banks in 1969). But at the same time government also slowly started releasing its grip over private sector by Industrial policy statement of 1973 and 1977.
However due to stringent licensing system, not everyone could get a license for setting up an industry and as a result of this, money started accumulating in fewer hands(a direct violation of directive principles of state policy of the constitution). This was also indicated by “Hazari committee”, “Mehelinobis committee” and “Dasgupta committee”. Finally government decided to intervene in the mergers and acquisitions. Government could ask any big business house to break, if it feel that the business house has grown to such an extent that it is depriving others from making profit or the benefit of economy are not reaching to the ground level. At the same time government had the right to “say no” to a merger between two big business houses or industrial units, if it had a negative impact on others. So, practically speaking government got the rights of “marriage and divorce” of industries. However, even this step could not bring any benefit to industrial sector and Indian industries became uncompetitive internationally. So, finally government brought about a sea change in its industrial policy and came up with Industrial policy of july1991. Under this all industrial licensing were abolished except for 18 industries (like coal, alcohol, petroleum, hazardous chemicals etc...). So, about 85% of industries were taken out of licensing framework. Also, number of industries reserved for public sector was reduced from 17(in 1956) to 8(1991), (Now only 3). MRTP was also scrapped off as it was making Indian industries uncompetitive.
But as MRTP was scrapped off, so government had to come up with an alternative. Hence in 2002 government came up with “Competition Act 2002” under which government got the right of “Marriage and Divorce” of industries from the point of view of “Abuse of Dominance”. So before 1991 government had the right to stop the growth of any industrial house if it was dominant and depriving others from profit (even if it got dominant by fair means), but now government usually take action only if an industrial house has achieved dominance by unfair means (however it is alleged that this is more or less restricted to papers. The recent controversy of Anil Ambani-congress had supported this view in which reliance was alleged to take favor of government for gaining access to 3G spectrum).
However it is clear that after 1991, Indian industrial sector has achieved tremendous progress, which is clear from social and economic progress of India. But one should not compare India with developed nations like U.S, Britain, etc. United States got independence in 1776 and took more than 150 years to become superpower. James-I signed MAGNA CARTA in 1215, but Britain got the status of developed nation only in 20th century, after the industrial revolution (and everyone knows how they did it? By ruthless killings and plundering others). China got settled in 1949, but we cannot attain status of rich economy on the dead bodies of innocents as china did by communism, which is nothing but radical form of socialism.
India is a true democracy, so we may take a little longer to get status of developed country but we will surely achieve it and current Industrial policy of India is just a step forward towards achieving this goal.

RBI's NEW INITIATIVE

RBI has decided to increase the cap on advance remittances towords the import of services. Banks will now allow firms to make advance remittances upto $500,000 without a bank guarantee,against the previous limit of $100,000.

ENTRY OF TESCO

TESCO,U.K's supermarket group has announced plans to develop a wholesale cash and carry business in India,commiting an initial investment of upto 60 million pounds in the first 2 years. TESCO has also signed an exclusive franchise agreement with TRENT,the retail arm of TATA group.

I.O.C. and the Bond market

After a gap of 6 years IOC has tapped the bond market to raise term money at a fixed rate of 11% for 10 years and 11.15% for 3 years. The issue size is Rs 300 crores but company can accept higher subscription under GREENSHOE option. IOC is the largest refining and marketing company that controls 10 out of India's 19 operational refineries. IOC suffers a loss of Rs 240 crores everyday on sale of its products at a subsidized rate.However,this is recompensed by Government through issue of OIL BONDS.

FREE TRADE AGREEMENT BETWEEN INDIA AND ASEAN

India and ASEAN have agreed to sign a free trade agreement in December 2008.The FTA between India and ASEAN is expected to boost bilateral trade to $50 billion by 2010 from the present level of $35 billion. It took six long years for two sides to conclude the negotiations as the talks tripped several times over issues like RULES OF ORIGIN(R.O.O)and market opening by India for 5 sensitive agricultural products including tea,coffee,palm oil and pepper.
While R.O.O issue was sorted out some time back,the talks kept getting stuck on the levels of tarrif reduction on 5 products especially crude palm oil and refined palm oil.
An agreement on palm oil duties was finally reached in early August 2008 after India decide to improve its offer in CPO to 37.5% and RPO to 45% over its offer of 43% and 51% respectively,made in january this year.
India has also agreed to lower duties on coffee and tea to 45% and pepper to 50%.
Under the pact,India and ASEAN will eliminate import duties on 71% products by December 31,2012 and another 9% by 2015.Duties on 8-10% products that have been kept in the sensitive list will also be brought down to 5%. India will keep 489 items in the negative list of products to be excluded from tarrif reduction commitments.

NSE Trading In Currency Futures

NATIONAL STOCK EXCHANGE has announced the launch of trading in currency futures from 29th august 2008. For the first time in India, it would now be possible to trade on the currency futures on a stock exchange platform.
Currency futures are standardised foreign exchange contracts traded on a recognised stock exchange to buy or sell one currency against another on a specified future date,at a price specified on the purchase or sell date. Currently RBI has approved only USD-INR currency futures to be traded on the approved exchanges.
The size of the contract would be $1000 and they would expire on the last business day of any month at 12 noon. The contracts will be quoted and settled in rupees and the settlement price of the contract would be RBIs reference rate on the last trading day.