Energy Prices and the Future Climate

Falling oil prices, rising oil prices, and then the hope that everything will fall into place. This has been the agenda on everyone’s mind, especially the oil rentier economies. While falling oil prices have made researchers agree on the fact that there may not be any positive effect on pollution levels, carbon emission levels, and intrinsically the consumption levels, there is a wide opinion that oil-price rises may be good in reverting to the prior of employment and gross income of many allied businesses and otherwise.

The reason for such undeterred levels of consumption may be the fact that the potential for demand is improving year on year. A recent survey results of the World Bank made it clear that there is atleast a 15 percent gap in electricity consumption. Nevertheless, such consumption still has traditional sources of power/electricity. This also means that there are prospects for renewable energy usage by this potential segment.

In the same context, energy giants like Total and Shell have announced investments in renewable energy. Call it taking a safer route, or improving fortunes, these are welcome initiatives in reducing carbon emissions, and a less polluted environment for the future. Unstructured oil markets, and supply issues that still to be worked on, it is certainly a good time to think of investments in energy that has long-standing future.



A Market Economy – What, How and Why

The recent hubbub about granting ‘market economy status’ for China has promulgated quite a debate. The concept of distinction between a market economy and a non-market economy was first embedded during the time when transition economies were considering their role on the global trade platform. It all started with the introduction of anti-dumping investigations and laws thereof; the distinction between a non-market and market economy status lies in the process of determination of prices. When the prices are determined by demand and supply in the market and not (thoroughly) by government intervention, the economy is a market economy. Normal value of goods is arrived by government intervention, in a non-market economy. There is a chance that prices may be distorted due to this intervention. However, this is just for the sake of definition. The really difficult part is to know that for an economy to transition to (into) a market economy from a non-market economy, there are several changes or transitions to be experienced and witnessed. Transition towards a MES requires a lesser political hand and a more social and economic hand. However, without a strong political development, neither social nor economic reform is possible in the long-run. Therefore, more than economic challenges, political challenges come to play during such transition. And then there are issues that accompany transition. Some notable consequences of transitioning to a market economy are new levels of inequality, regional imbalances, unemployment/employment, environmental issues like increased levels of pollution, rapid energy consumption, neo-political empowerment, and others alike.

The fear of ‘market failure’ is always imminent when there is a nouveaux transition. To counter market failure and the potential outcomes as stated above, both government intervention and market strategies may be followed. One of the main objectives of a transition is (ideally), not just making the economy independent, but also making it sustainable in the long-run. A combined, innovative approach that addresses several of these issues comprehensively, may be a plan.

The goal of a market economy is inclusiveness and equality, and therefore, self-sustenance. A better way to put it would perhaps be, a market economy is ‘where one gains without the other losing’. Nevertheless, one of the looming demerits of such an economy is that there is a chance that there are imbalances of wealth, opportunities and performance.

Debt-stricken Worries

Known for its brilliant debt management strategies, China, one of the most influential economies of the world, now is in the shackles of more debt. As of April 2016, corporate debt in China is 160 percent of GDP, and is only going to rise, according to the IMF. This has been predicted so, because of the increasing number of firms that are coming under the purview of ‘risky’ or ‘high-risk’ category of firms.  Non-performing loans (NPLs) had been managed by China back in 1999, by creating asset management companies, which purchased state-owned banks, with 10-year government bonds. Writing off these bonds had been easier in 2009, because of their value decreasing from 20 perc of GDP to less than 5 perc of GDP. However, with the global financial crisis hitting China, the 10-yr bonds were rolled-over to another 10 years, they being potentially reckoned in 2019. However, the NPLs and the debt overhang faced in the aftermath have been huge. Though the plan was to shrink this huge debt overhang by a further percentage, making it more manageable.

A recent estimation by IMF states this much at risk, as far as China is concerned: 15 perc of Chinas overall commercial lending and banking sector losses of more than 7 perc of GDP; this, in essence meaning that NPLs will rise.

IMF points out that one debt management method may be conversion to equity. How much this method will help in reducing NPL stress is a substantial question. The method has been a popular one in the last few years. Debt to equity conversion is perhaps the first welcome step in tackling NPLs in several financial systems. But, when the corporates involved are already in distress and are non-viable or vulnerable, conversion to equity will only entail more risk to the investors. For example, when this method was sought for in India, market capitalisation of firms in the vulnerability or known stress levels of the considered corporates was at an average of 90 perc.

Part liquidation, and part shareholder ownership would probably suit the existing conditions. Rating companies on the basis of stress, and deciding on liquidation and/or equity ownership will reduce the stress on investors. Getting an outside management team to oversee the functions, performance and profitability of the managed companies would further boost investor confidence.

Spend less? Spend more? Save more?

How much did an average American retail consumer spend in 2015? Less than 2014? Or more? Spending is a habit. But saving is a good habit. However, the consumers in America are being asked to relinquish their desire to save more.

The reasons cited are many: dipping exports, lesser investments by the oil and gas firms – in line with decreasing oil prices, and reduced consumer spending. Consumer spending worsened with little or no growth at the end of 2015, and now in the beginning of 2016.

An economy’s GDP depends essentially on the purchasing power or in other words ‘spending power’ of its dwellers. The more the consumers are willing to spend, the more the production will be, of retail as well as industrial goods and services. It is all about matching supply and demand. American consumers seem adamant on spending much these days.

The best reasons that one can come up with are behavioural. When a consumer has surplus cash, he splurges on necessities and luxuries, almost equally on luxuries. And when the same consumer is strapped for cash, he uses what he already possesses and purchases only necessities. There is a significant point here – his purchasing power has decreased, because of reasons like loss of employment, rising prices, etc. But in the existing case of the US, purchasing power seems intact, and the habit of saving seems to have taken over. A person whose job is intact and whose earnings are just the same, will save only if he has learnt some lessons from splurging in the past, or if he is saving for something really big in the future (education and real estate/property come into mind). This behavioural reason seems most appropriate at this juncture.


The path to a self-fulfilling economy and the existing scenario

A self-fulfilling economy is a fairly basic concept in economics. Demand generates production- which generates employment and therefore wages – and wages generate consumption – which again generates demand. Lets keep this aside for a minute.

Secular Stagnation has been the phenomenon since 2008, and the only solution seems to be in the root of this cycle – Demand. Increasing the level of aggregate demand and therefore providing an inducement to the system, may be a solution for the short-term and medium-term. Then, what about the actual part where the economy must become self-fulfilling at some point?

The starting point to the explanation is probably in a paper by Krugman (1979, 1996)[i]. The paper talks of models (and changes in models) describing the then existing currency crisis – essentially from two perspectives; the need to monetize and maintain a fixed exchange (to run away from the then existing crisis, to be exact), and the need to contemplate the crisis from solutions to it and thereby maintenance of objectives (for the long run).

When just one fundamental factor like interest rate is considered, rising interest rates were predicted to create major credit crunch starting in economies like China, Brazil, Chile and others, seemed inevitable, back in September 2015. There is bound to be some spillover effect, particularly in the emerging markets like India, China (yet again) and some more countries that are particularly labour-intensive. More on this kind of effect is detailed in this study.

[i] Krugman’s paper:

Energy Investments and Prices – What is in store?

In an article last year, Asian countries, particularly China, were appraised with regard to energy efficiency and investments thereof. It was observed that China, with wise investment in energy efficiency, has managed to reduce its energy intensity per unit of GDP by 70 percent, from 1980 to 2010. It will be interesting to note that a lot of economies have taken up this agenda since the last several years. The US, for example, starting from 1992, has been active in improving efficiencies of various electrical and mechanical equipment to both suit needs of the economy as well as save on energy[i]. So much so, that it was recently estimated that from 2010 to 2015, there were savings of an estimated USD 2.4 billion in energy costs; and this number was for the large manufacturers alone.  Europe has also taken impressive steps towards energy efficiency. It can be said that some steady progress has been because energy use has reportedly reduced less than that was in 1990.

China is not a recent entrant, but with its achievements, it has proved that even with such massive population and imminent pollution levels, it is possible to reduce energy intensity. It is definitely a model for other Asian economies, especially its counterpart, India.

While most economies try to reallocate resources and make adjustments for what has not been done till date about energy efficiency and reducing energy intensity, one wonders about the relationship between renewable fuel price and energy efficiency. Already, in 2014, it has been observed that fossil fuel price and renewable energy prices are competing with each other in some coutnries. This may actually be a good sign, showing that renewable energy is being consumed almost as equally as fossil fuel. Another good thought to take home is that renewable energy being a technology, will have its costs reducing in the long term and reach economies of scale. This only means more renewable energy to the consumer.

[i] Details on US energy policy:

The Road to Privatisation

In the neighbourhood we live in, there are a few narrow roads that lead up to the main road. While road no.1 is inconveniently narrow, road no.2 (the one that has all the offices and residential building), is wider but has vehicles parked on both sides, making it narrow. Road no. 1, which is a short-cut to offices and other destinations, is so narrow that even if one on-coming vehicle squeezes through, there is little chance that the flow of traffic goes unobstructed from the other vehicles. The result of such counter-traffic (definitely more than one vehicle) is generally a jammed-up road. The other result of this has been increased levels of concentrated pollution. This situation (of more than one on-coming vehicle passing by) has gone for more than 2 years. About 5 weeks ago, we saw a barricade at the entry point of the road, which read ‘no entry’ for the on-coming vehicles. The discipline lasted for about less than an hour. After this, it was not a surprise that people chose comfort over discipline or the chance to avoid some pollution. Two weeks back, vexed with such attitude of our own neighbours, some of us stood and controlled traffic by holding placards and redirecting vehicles to a wider entry point. Also, we worked on constructing impediments for waiting cabs that were parallely parked on the road, even though there was place inside the office complexes. It took us two weeks to get people to adhere to a complete discipline and we were successful in reducing any congestions that occurred on these two roads.

A recent news report that talks of privatisation of water services has been the first step towards the direction of privatisation of municipalities and/or municipal services in India. Although, when it comes to roads, highways and such, the idea is slightly different. Roads represent a major chunk of revenue for municipalities. Of course, the use of these taxes to repair temporary and long-forgone roads is a still a question, because we have been victims of not just bad roads, but also murderous potholes. The municipal regime may not fully agree or come to terms with these facts because laying roads once before monsoon and/or winter showers is where their “duty” ends. Maintenance does not count as one of their duties or responsibilities. (Now, the reasons for road damage are several; in our city, the main reasons are heavy and continuous rains, and heavy vehicles.)

Lot of us may agree that privatization of neighbourhood roads or a public-private partnership (the latter being the more viable option) would be a nice beginning towards building good roads. It has been observed that for a builder of a commercial or residential complex, construction of approach roads are his responsibility. And this expenditure includes the cost of construction and the taxes that he would pay every year. If the builder start maintaining these approach roads on his own (privately), his expenditure would be much lesser than the taxes he would pay every year to the municipality. Therefore, perhaps even the builders are ready for such a bargain. But are municipalities ready to forgo their tax-revenue? Will this be more of a trade-off for them where they do not have to bother maintaining such internal roads and thus do not have to bother about the use of the taxes they collect?

Will India ever have a Housing Index?

The Housing Index in India is perhaps the most debated issue till date. While there are two indices in India, that cover house prices – The National Housing Bank’s Residex and the RBI’s House Price Index (HPI) index, both are updated quite infrequently. The Residex is updated on a quarterly basis, the latest index values being available up till January-March 2015, for 26 cities.  RBI’s house price index is also updated on a quarterly basis, the latest values being available up till the last quarter of 2014, for 10 cities. The index values of both these indices are different.

A house price index can possibly eliminate price risk, and give an insight into future prices. When Indian house prices and house price indices are compared to those of other economies like the UK, Australia and US, several aspects are to be considered even before deciding on constructing a housing index for India. The first of them is the source of volatile house prices. The source of  volatile prices seems to be constant shortage of supply of land that has been zoned and/or approved. One may wonder why this shortage exists; there is something called ‘hoarding’ of land that has been happening in India. Either zoned land has been rationed, or ‘approval’ of lands has been delayed. But remember, there is no shortage of demand whatsoever, considering ever increasing urbanization, population and literacy levels in India. People desperately want to own a home but are afraid of two factors – prices of homes, and the illiquidity in the market.

Will house prices ever shrink? Will the supply ever match the rising demand for houses? The answer is perhaps a blatant “no”, the reason being that real estate has been the source of political money. Selling hoarded land pieces, and making huge return on them, and in turn investing them in other land and expecting an even greater return has artificially hiked real estate prices. The circle of transactions continues with other investors with black money looking to reap from the opportunity costs, speculators who want to take advantage of arbitrage of land prices, and brokers and developers. Therefore, the prices of residential properties will tend to rise in the near future, no matter how much the demand rises.

So, in this scenario, does India qualify for a housing index at all?