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Impact of the hike in gas price

The new price of gas at $8.40 will be applicable to all types of gas, shale, coal bed methane or conventional. Coal methane gas is more likely to be tapped as compared to shale because the latter requires enormous amounts of water in the separation process

The Cabinet Committee on Economic Affairs (CCEA), while accepting the Rangarajan Committee recommendation in toto, has approved the new price of indigenous gas, produced by Reliance Industries (RIL) and ONGC at $8.40 per mmBtu (million metric British thermal unit), with effect from 1 April 2014, as against the current rate of $4.20.  It has overruled the via media price of $6.77 proposed by the oil ministry. No explanation has been given!


The current ruling price of imported gas is around $ 14.17 per mmBtu, and the price of $8.40 is therefore cheaper, if that is a consolation!


It is now assumed that with this revision, gas producers like RIL and ONGC will be encouraged to pump out more gas out of their wells, if necessary, by bringing in additional balancing equipments and endeavour to explore new areas to locate gas. Such new finds will take three to four years to be able to supply gas.


The new price of gas at $8.40 will be applicable to all types of gas, shale, coal bed methane or conventional. There are reasonable prospects that coal methane gas is more likely to be tapped as compared to shale because the latter requires enormous amounts of water in the separation process.


Already, the fertilizer industry is up in arms on this increase. The impact on increased gas price (costs) is likely to be offset by a greater amount of subsidy by the government, which has been hinted by the finance minister during the interview when the announcement was made to increase the gas price. 


Why not allow the fertilizer industry to set its own market price, instead of control by the government?  The intention has been to ensure that the farmer got the subsidized fertilizer.  So far, so good, but what is really happening is that in the end, the farmer does not get the desired benefit, which is actually taken away by the landowner and/or the chain of middlemen who sell the produce.


Elimination of this group is essential, if it is the ultimate desire of the government to help the farmer. Besides, how long will the government go on subsidizing this industry?


This revised gas price, which is effect from 1 April 2014 is valid for five years, but will be reviewed every quarter, according to the Committee. What purpose will this serve?


The debate on pricing is likely to go on endlessly. Should there be any reference, if at all, to international market price, when deciding the price for indigenously produced gas?  In a way, yes, because if there was no production within the country, and the demand has to be met, it can done only by imports. Hence, technically, an attempt has been made to substitute imports by indigenous production and, as a sequel, we need to fix a notional and realistic price to the product.


Yet, a 100% increase from $ 4.20 to $ 8.40 is very high.


In the meantime, in order to meet the growing demand, bearing in mind the shortage and lower production at home, we have to continue our dependence on imports of LNG (liquefied natural gas) from our principal source of supply, the Emirate of Qatar, in the Gulf.


At the same time, India’s quest has taken long and arduous routes to obtain gas from Iran, Turkmenistan and Myanmar, via pipelines that will have to be laid in cooperation with countries which will have vulnerability as it has to pass through Pakistan, and Bangladesh. The discussions and negotiations have been going on for years now and with no result at the end of the tunnel. Is it a pipe dream? So, far, yes!


In regard to the new gas price, it is essential that the Committee urgently clarifies the following issues:


                 a) Why should the pricing be done in dollars when the production is indigenous?


                 b) assuming this to be relevant for relative pricing based on international (import) costs, why NOT the government peg the dollar-rupee ratios? If the rate today is Rs50.87 to a dollar, do they project the rate to go down or up?


                 c) from the assured production RIL failed to supply in the past two years, even presumably under the technicality of force majeure conditions, how do they plan to compensate the “loss of supplies” of the past, and how do they make up if this happens again?


                 d) since Qatar has abundant gas, and with whom we have close relations, why not the Government of India jointly set up one or two large urea plants in that country and import the finished product?  In return, they can guarantee essential commodity supplies—whether it is basmati rice or meat or any other products and services that Qatar may need?


It is imperative that the CCEA looks at these issues seriously.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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Fed is angry; fasten your seat belts
The Federal Reserve is angry that the market is not following its instructions and it is no longer calling the shots. The Fed has enjoyed manipulating the market, but its success now appears transitory
Any parent knows that it is easier to give children a treat than to take it away. Giving a candy creates smiles and squeals of joy. The parent basks in the adoration of a grateful child. How can such a wonderful feeling be bad? But when the time comes to disciple the offspring, things change. The child often goes into a screaming tantrum. The parent feels like a louse. How could any parent cause a child so much pain?
For almost five years central banks around the world have made markets very happy. They have given them massive amounts of money. When they ran out they just created more. Every coo by dovish central bankers was greeted by another percentage point rise in the equity markets. Global markets assumed that it would go on forever, but it never does. 
Recently Ben Bernanke and the US Federal Reserve have stated that the extraordinary stimulus known as QE (quantitative easing) will be ending. One of the members of the Federal Open Market Committee (FOMC), Richard Fischer, warned that markets should not think the Fed would end up propping up the economy indefinitely. He said “We’ve had a 30-year bond market rally. These things do not go on forever.”     
It is not only the Federal Reserve, the People’s Bank of China (PBOC) is also slowing its stimulus. New credit creation in China as a percentage of GDP has grown 84% in the past five years, twice the rate of credit creation in the US five years prior to the crash in 2008. Worse the amount of debt issued by so-called shadow banks has almost increased 80% in the last two years alone. To gain control of the financial system the PBOC stopped infusing liquidity into it which temporarily drove interest rates up 28%.
The markets have not looked favourably on either of these moves. The US S&P index has dropped almost 5% since May while the Shanghai index is off 12%. But are these temporary tantrums or a portent of things to come?
The Bank for International Settlements (BIS) is sure to make itself unpopular. It advised that central banks should head for the exit and stop trying to spur a global economic recovery. The BIS’s argument was that the stimulus had bought time, but it was now slowing the recovery instead of helping it. It said “Alas, central banks cannot do more without compounding the risks they have already created.”
The squeals of pain were predictable. The Financial Times editorial disagreed. It cried that “In the absence of inflation danger, tighter money now would do real harm”. But who is right? Is inflation the only risk or are there deeper problems? The gyrations of the market should indicate something and it isn’t good.
The real question is risk. What sort of risk has this entire stimulus created and is it simply a question of inflation? I doubt it. First, programs like quantitative easing are experimental. They are barely used. All experimental programs have one thing in common, their long-term outcome is uncertain. QE seems to be beneficial, but the best that can be said is that the benefits are short-term.
This is especially true in the present global environment. Both China and the US may be focusing on their local economies, but the stimulus does not stay local. The effect of the stimulus in the US may have been tepid, but it certainly spurred emerging markets. America might be bubble-free, but the search for yield caused by the Fed’s policies certainly put some air in emerging market bonds. A reversal has sent them plunging. China’s stimulus resulted in double digit growth in China in 2010, three years ago, but its voracious demand did wonders for its trading partners. As it slows, the effects will be felt far from its shores, from the copper mines of Peru, to the palm oil plantations of Indonesia. 
A third risk from the stimulus is the unintended consequences. The Federal Reserve can pour money into the economy. The Chinese government can force banks to lend, but neither government can make the money go to the most efficient firms. In China the money often goes to local governments or state-owned firms. They both have little chance of paying the money back. In the US the consolidation of the banking system has made it difficult for smaller firms, the ones which create the most jobs, and home buyers to borrow money. But it is easy for hedge funds to get their hands on billions to use in speculative, leveraged investments. 
The fourth risk is the size of these stimulus packages. Since 2008, the balance sheets of the big central banks have exploded from $5 trillion-6 trillion to $18 trillion. Their assets in several developed countries have reached 20%-30% of GDP.  The concept seems to be that if a little medicine is good, a whole lot more would be better. These numbers are unprecedented, so their effect is basically unknown. Worse the policies are uncoordinated. Exits from policies this size cannot be accomplished quickly or easily, so the winding down will not be as much fun as the ramping up. At some point too much medicine can be poisonous for someone.
These policies, like all policies, are based on assumptions and information. But economic information is often the result of approximations and many governments, specifically China, are notorious for providing the wrong information. Anyone who has followed the month to month gyrations of economic data would despair about the probability of predicting a specific trajectory or the success of any policy without a consistent, extensive track record.
In the collapse of 2008, financial innovation was implicated as one of the main culprits. Financial innovation has continued even with the slower economy. The number, size and variety of Exchange Trade Funds (ETFs) have grown exponentially. Some of these ETFs especially the ones that represent bonds can be very illiquid. The recent wave of selling caused many ETFs to tumble below the value of their underlying assets as a bond market sell-off caused stress in the $2 trillion ETF industry. An ETF sell-off only exacerbates the problems.
The BIS also mentioned that the central bank stimulus was always meant to be temporary. The programs were meant to buy time for politicians to make necessary reforms, labour reforms in Europe, Brazil, India, financial reforms in China, regulatory reforms in the US. Sadly, without the pressure of crises, politicians have done exactly nothing. So the delay has just made things worse.
Perhaps these risks were considered, but the only one that seems to have been important was inflation. But now that it (Fed) has announced the potential end of the program, the Board of Governors of the Federal Reserve is forced to face reality. Interest rates in the US have increased by a percentage point in less than a month. Mortgage rates have moved in the same direction threatening the nascent housing recovery. 
The rapid rise is rather predictable, but it has led to a stream of condemnations from the Fed members. President Fisher’s now famous comment sees a conspiracy of “feral hogs” driving interest rates up. Federal Reserve Governor Jerome Powell complained that the spike in bond yields over the past month is ‘larger’ than would be justified by any “reasonable reassessment” of the path of Federal Reserve policy. 
In short, the Federal Reserve is angry that the market is not following its instructions and the Fed is no longer calling the shots. The Fed has enjoyed manipulating the market, but its success now appears transitory.
Perhaps the best indication of the problems associated with the Fed’s policies and a prophecy of things to come was the vote from other central banks. Rather than work with the Fed to tame the markets they jumped right in. They sold a record $32.4 billion US Treasuries eclipsing the prior mark of $24 billion in August 2007. It was the third week out of the past four where there have been sell offs. After all supporting your friends is one thing. Losing a lot of money is quite another.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)



nikhil chopra

4 years ago

politicians will only do what suits them....and not the public in general....for india 2014 is an election year....god save us....

Dayananda Kamath k

4 years ago

all the central banks and govts have treated the symptoms rather than the decease pumping in more money they have supported the cause which resulted in the crisis. not to be unpopular for taking right but painful steps to correct the situation they have supported the crisis and postponed it. it will come back with more severity and we may not be able to control it.

Hemlata Mohan

4 years ago

Yes, it is high time these surgeries which only give a temporary relief are stopped.
Politicians and governments must find the deep rooted causes and address them instead of relying on band aid methodologies.

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