FINACEA TIMES

Flow of Barrel Price over Dollar of Last Six Months

CRUDE OIL

The top 6 reasons for crude oil price to fluctuate:

China is the second largest consumer of oil in the world and recently it has sur-

passed USA as the largest importer of liquid fuels. In the last quarter of 2014 we

saw that china had the slowest growth in over a period of 25 years. If the growth

slows down further then the consumption of oil will be affected. It’s important to

note how much consumption of oil China will Increase to impact the prices of oil.

Another factor to consider is USA producing 9 million barrels of oil per day. This

enormous output crashed the prices. Even though the number of oil rigs contin-

ue to fall the production level is still too high for prices to fall. If the production

level is the same throughout 2015 then we won’t see much change in oil prices.

Then we have to look at the elasticity of demand. In some countries the oil is

subsidized and people tend to use more. In some other ones the low prices

don’t really trickle to the retail level. For instance the subsidies given by the In-

donesian government are being scrapped as the oil price is decreasing but for

USA there was a huge demand as the oil prices fell below $2.40 per gallon.

OPEC is the other factor to be considered. The oil cartel has the ability to down-

size their production and in turn raise the prices.

Since November 2014 we are seeing that the prices of crude oil is falling but the

production level hasn’t fallen and Saudi Arabia

August 2015

Geopolitical crises have a short term

effect on oil prices. For instance, in

2014 violence in Libya blocked oil

exports thus results in increasing the

price.

The last but not the least is the

strength of USD. Global commodity

prices are mostly quoted in dollars

and when the USD rises, the com-

modities begin to fall. In the second

half of 2014 the surge in USD

brought a sharp fall in the commodi-

ties index.

-Ankur, Shamik, Abhishek, 2015-17

IN THIS ISSUE

Fluctuation in

Crude oil prices

The Greek Cri-

sis in Plain

Simple English

Greece vs.

India: Similar

plot with a

different twist

Firstly, the Greek government and its unchecked public spending since the 1980’s, laid

the building blocks of this situation. Every Government that came into power spent

heavily on pension provided to civil servants and retirees to buy votes and did not fo-

cus on collecting comparable tax. This increased their fiscal deficit year on year and

they financed it through unprecedented loans. When Greece joined Euro in 2001, the

interest rates on its bonds became comparable to that of the strong economies such as

Germany. Also, Greece found its new investors in the form of bondholders having high

maturity periods. Instead of making use of this situation, the government became more

liberal in its spending. For instance, for preparations of the 2009 summer Olympics,

Greece spent 9 times more than Sydney had spent for the previous Olympics.

But Greece alone is not to be blamed for its woes. The market itself was unable to

properly judge the credit rating of Greece. Since around a century, Greece’s currency

was being devalued almost every year. Low productivity of Greeks was a primary is-

sue, among many other reasons. Thus this made Drachma, Greece’s earlier currency,

more competitive wherein its imports became expensive and exports became cheap

and consequently the balance of trade between its imports and exports always reached

equilibrium.

The real problem began when Greece joined Euro. Now Greece could not play with its

currency anymore and make the currency adjustments. Greeks had to accept actual

salary adjustments to maintain its competiveness. A case in point is that to enter into

the EU, Greece indulged in an extremely “creative and intelligent” practice of

bookkeeping thereby understating the fiscal deficit by as much as 3% so that it could

meet the norms of EU.

Although, Greece was aware of the major alterations it has been doing, it entered into

agreements regarding the size of budget deficits and loans to be extended. Further, to

obtain more funds Greece kept cooking its accounts until the sub-prime crisis hit the

market in 2008 and Greece could no longer keep the economy in control and crashed

along with a few more EU economies like Spain and Portugal.

-Sidharth Singh Chauhan, 2015-17

The Greek Crisis in Plain Simple English

The Greeks have rejected another wave of austerity measures imposed by Frankfurt. In

the recent public voting, the Greeks thought by putting up a NO, they were actually re-

gaining control of their economy. But it seems otherwise. This paradoxically has given

more control to the two main creditors-France and Germany-control over the midterm

economic future of Greece. But it led Greece to fall into such a huge pit of financial tur-

moil that it can’t even see a speck of light.

The reasons are both endogenous and exogenous

“The direct im-

pact from Greece

is limited, our

sense is after the

initial burst of vol-

atility, investors

will start differen-

tiating and when

they start doing

that they will see

that the India sto-

ry continues to be

a good one. We

not only have

good macro-

policies in place

but growth pro-

spects are quite

healthy as com-

pared to the rest

of the world”.

-Dr.Raghuram Rajan

Greece vs. India

Similar plot with a different twist

On a hot summer afternoon, India transferred $600 million worth of national gold from the lockers of R.B.I to I.M.F headquar-

ters at Washington D.C ,U.S.A so that we could get 3 weeks’ worth of imports to cover balance of payments and fetch our

crashed economy.

The ongoing Greek crisis and the buzz around it raises alarm and reminds many Indians of that dreadful year, when the Indi-

an economy was on the cusp of falling and defaulting on its interest payment to the IMF, a situation in which Greece finds

itself currently in.

Greece got into this situation after the 2009 sub-prime crisis that hit the global financial markets when it finally disclosed

years of underreporting of fiscal deficit. What followed was one of the worst financial crises that EU had ever seen. Investors

pulled out money, banks denied loans, and Greece was shunned out from borrowing in the international financial markets. By

the summer of 2010 it was nearing bankruptcy.

To avert this looming calamity that put the future of EU also under question, the so called “Troika” – ECB, EU and IMF- is-

sued the first set of bailouts to Greece in a series of acts which would eventually put the debt on Greece at a whopping $264

billion. The money came in with a lot of conditions. The lenders imposed harsh austerity measures, requiring public spending

cuts, tax increase, streamlining the government and making Greece an easy place to do business in.

India also encountered a similar situation during the 1991 crisis when the socialist, democratic country following the footsteps

of the then Soviet union, had to finally do away with its stringent trade policies and unleash an era of reforms namely LPG-

Liberalization, Privatization and Globalization. Owing to these reforms, the Indian economy opened up to private ownership

of industries and welcomed Global businesses to invest in different sectors. It does not come as a surprise when economists

viewed these slew of measures as India opening up to the international economy under the pressure of “Global Forces”, a

faintly similar situation which Greece has experienced.

This striking similarity invited calamity for the two countries. Both the countries got into such situations due to high govern-

ment spending and weak central planning. Greece was exposed due to the Sub-prime crisis whereas India stumbled due to

foreign forces. The primary reason was due to the Soviet Union, which was India’s major trade partner and incidentally was

divided into 15 smaller nations in 1991 followed by Iraq’s war with the US, which escalated the crude prices to astronomical

levels thus making imports costlier for India.

-Shantanu Srivastav, 2015-17

Fun Page

A man flying a hot air balloon makes an emergency landing in a field. He calls out to a passer-by, "can you tell me where I

am?” The passer-by responds, "You are in a balloon in the middle of a field." To this the man says "you must be an account-

ant. The information you gave me is totally accurate but utterly useless." The passer-by then retorts, "And you must be a

CEO. You're steering a craft over which you have no control and you want me to tell you where you are going."

Bankers are people that help you with problems you would not have had without them.

A man visits his bank manager and says, "How do I start a small business?" The manager replies, "Start a large one and

wait six months."

Q: What’s the difference between Greek Investors and Pigeons?

A: The Pigeons are still capable of making deposits on new cars.

Design Credits:

Saurav Dutta, 2014-16

Ankur Sikdar, 2015-17

Abhishek Chauhan, 2015-17

Jayvardhan , 2015-17

Shamik, 2015-17