Chinese drought, financial troubles, increased oil production will keep oil price stable to lower for now
Babu Ghanta
Apr. 5, 2005

The whole world is focused on the oil price. Major oil analysts have already announced that oil will hit more than $100 a barrel. Some of these same people are calling for $1000 an ounce in Gold price. Experience and history of financial markets show that these loud speakers are most of the time dead wrong. If you check the history, you will find any time the Radio, TV and major magazines start crying on any commodity or investments, the top is formed and prices stabilize and starts coming down.

Let us analyze why oil price may stabilize contrary to all expectations. India, China and US are the three biggest users of oil and related products. All of them are major importers.

China has major problems in front of the country. The banking corruptions are very serious. The Government is capable and probably will hide these problems for a long time. But they have another new problem, which can really be the economic killer. More than 9 million Chinese living mainly in coastal provinces face drinking water shortages due to the worst drought to affect parts of China in 50 years, the China Daily reported on April 4th. The drought also could hurt spring planting of rice in the south and wheat in the north. Hainan is one of the worst hit regions. Food is an important commodity in that part of the world. In India and China economies are linked to harvest and crop yield levels in any year. If the Chinese economy even sets back mildly, the oil will collapse to $35 to 40 per barrel.

The American economy is facing anemic job creation. That is why the long end of the bond market is telling us that the economy is extremely weak and will collapse the moment the extremely easy monetary environment is neutralized by the Federal Reserve.

Indian economy now depends on American companies exporting their jobs to India. If American economy falters, Indian economy not only will go in a recession due to lack of outsourcing contracts, there will be massive social problems due to very high unemployment among educated young youth. What India has done is very dangerous on the long term. They have made people go through colleges and Engineering Institutes, get their degrees and then thrown them into cheap low end Information technology jobs and call center jobs (basically telemarketing – the most hated jobs in America). This mechanical, chemical, civil, Electrical engineering graduates have forgotten their main subjects that they learned. They are low-end algorithm developers and not software engineers. In addition, in India most of the good students try to get a computer education to work for outsourced contracts. The situation is similar to what happened in America in the last six years. During 1996-2000 there was a shortage of people in Information Technology (IT) areas because of Y2K etc. People from all fields with no regard to their basic degrees and experience, were drawn into IT. People used to get a quick three-month training in an evening school and get a $100,000 job. During 2000-2003 American IT bust, all these people lost their jobs. They could not even go back to their earlier professions because they lost touch with their previous skills.

If Indian economy tanks, it will be equally serious like in China.

The OPEC, the Russians and the Canadians are pumping crude at their best possible levels. All are busy expanding capacity of pumping and refining crude oil. Russia averaged oil output of 9.3 million barrels per day in the first three months of 2005, 3.5 percent higher than the first three months of 2004 If the demand slacks, the market will be flooded with oil and gas.

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