Is the Oil Rout a Russian Roulette?

Russian Roulette, is a lethal game of chance. It involves a person with a revolver and a single round. The round is placed in the cylinder and spinned into position. The muzzle is put against the head and the trigger pulled leaving to chance the outcome.

The Oil Rout (2014-2015), is an ongoing crisis in the oil markets. It has been triggered by the reluctance of the biggest oil producers (OPEC especially) to cut supply despite sagging demand driven largely by the slowing Chinese and European economies.

There are rational reasons as to why the Oil rout is happening. The United States of America is tasting success with the Fracking process in exploiting the Shale Reserves abundant in their country and is poised to overtake many existing Oil economies including Saudi Arabia in production. It is alleged that the OPEC members fearful of losing their market share have kept supplies constant.

Keeping the tap flowing serves dual purposes for OPEC. It enhances delivery mechanism and infrastructure with the client thereby strengthening the business relationship wherein the client won’t look for alternate oil exporters. The other sinister purpose is with falling prices, Fracking, a laborious and costly process, would lose some of its sheen, breaking the balance sheets of the companies involved. This would be the ‘sweet crude’ news the OPEC members would be waiting to hear, Pun Intended!

A few years ago the US would have lunged into the situation in the middle east, brought a war or instability about, constraining production of crude which would lead to stabilizing of price. They are not interested in stopping OPEC this time. The reason, they are happy to see their other, old adversary, Russia, suffer. Russia being a predominantly export economy with Oil and arms as major exports is hurt. Once seen as the solid wall in the BRIC, the Russian Bear is expected to post its first negative growth rate this year.

But what if all this was grand game from the country that once dominated Chess. Therein lies the conspiracy (albeit, a far fetched one)!

Islamic State or ISIS or ISIL, a Sunni militant group is involved in fighting Shia governed countries - Syria and Iraq. It is not a secret that ISIS enjoys some patronage from other Sunni nations like Saudi Arabia and UAE. Even NATO member Turkey was reluctant to let the Kurds fight ISIS even after USA designated ISIS a terrorist organization. The reason was simple, in order to play a regional power Sunni nations needed to have proxies like ISIS to keep Shia dominant Iran and Syria at bay.

In the earlier days of victory ISIS controlled vast swathes of land adjoining Iraq and Syria. They were able to sell oil in the black market at discounted prices to maintain their war machinery. It was said the revenue was in millions of USD. They looked indestructible and was seen achieving a critical mass wherein their expansion furthered their oil revenues which feeded their expansions. 

However, the wheels of fortune greased by crude changed. With fall in prices, the revenue of ISIS probably fell. They have lost territories they once held. They had demanded ransom of $200mn from Japan for hostages. It seems they are no longer the fearsome power they used to be. 

And mighty Russia might, just might, be silently celebrating their master strategy yielding fruit. They helped their allies, warned its neighbours, took possession of a leased port along with Crimea, tested NATO’s resolve and reassured its ethnic population all in one big game plan.

Hillary Clinton likened Putin to Hitler. I feel Putin might be playing a Stalin - initiating a Scorched Oil Policy, burn a little and return victorious!

Bent for Barack or Flexed for Fission?

As the Air Force One lifted off it was time for us, Indians, to ponder what has been achieved. Both Obama and Modi are 'charismatic' in their own right and were great orators who were able to rally people with their speeches and mesmerized them to vote for them. It was therefore imperative to read between the lines to see at what cost, deals were achieved, as the spell of the #NamObama bonhomie cleared.

The one thing that stood out was the Indo-US Nuclear deal. This was achieved on day one of the presidential visit. The main bone of contention was the Civil Liability for Nuclear Damage Act, 2010. The act supposedly holds not just the operator (in our case the Nuclear Power Corporation of India) but also the supplier of the Nuclear Plant (the General Electrics and Alstoms of the world) and the fuel supplier. Now this legal minefield has been completely bypassed by the Government of India establishing an Insurance Pool to the extent of INR 1500 crores of which INR 750 crores is expected to come from five Government owned Insurance companies viz. General Insurance Corporation of India (GIC), New India Assurance, Oriental India Insurance, National Insurance and United India Insurance and the rest from the Central Government. I am impressed with the brilliant idea, however, I am equally or more concerned about the impropriety of this decision. 

Not long ago India entered a specialized group of select nations for having sent the Mars Orbiter Mission (Mangalyaan) to Mars. Not many people know that India never insured this rocket launch. Not only this India didn't insure Chandrayaan either or the countless other launches made using Indian rockets. They only insured rocket launches made from other countries with New India Assurance. New India Assurance in turn would reinsure it with other Global Reinsurance companies (like Spaceco of the Allianz Group). The Indian Reinsurance Company, GIC, was said to be lacking expertise or capacity or both.

The logic as to why none of the rocket launches from India were insured was straight forward. Indian Space Research Organization (ISRO) which was responsible for launching the satellites was owned by the Government of India. Similarly, New India Assurance Insurance was also owned by the Government of India. So any premium paid and claim honored would just be funds moving from one Government coffer to another.

Now the questions in my mind:

• Going by the logic in case of satellites, is it right to use Taxpayer's money to insure and in turn absolve the liability of another country's supplier of Nuclear plant and fuel? The premium will be paid by the operator (Nuclear Power Corporation of India) to Indian Government controlled Insurance companies to absolve the General Electrics of the world from Liability.
• GIC, found wanting in expertise to do actuarial work for satellites, has expertise to assess Nuclear Power Plants? The last time I checked Nuclear Power Plant accidents killed more people than satellite launch accidents.
• The Fukushima clean up till date has cost approximately INR 120 crores and the whole decommissioning of the plant is expected to take 40-50 years after which the actual cost will be known. Considering this, will a corpus of INR 1500 be enough?
• Will the PMANE, who were accused of being incited by NGOs backed by western countries against Russia, raise these issues against US suppliers. They had often quoted the Fukushima disaster in the past and now, General Electric, the company behind the Fukushima plant looks to setup plant in India without liability it would be interesting to see their course of action.

I am a big supporter of Nuclear Power Generation mainly because of the 3Ds of coal mining - Deforestation, Displacement of Indigenous Population, Damage to Wildlife and the pollution caused due to burning of approximately 15000 tons of coal per day for 800 MW (heard orally from a private thermal power plant in Tuticorin I visited).

However, the above questions have questioned my wisdom. Bent for Barack or Flexed for Fission? Considering the fact that we gave the Russians (and probably the French in the future) a similar deal, we flexed it for Fission! Hope it is worth it!