Worldwide oil prices have fallen sharply over the years, prompting noteworthy income deficiencies in numerous energy-based economies. From 2010 until mid-2015, world oil costs had been steady, at about around $110+ a barrel. In any case, since July 2015 to 2017 costs have divided and have now plunged beneath $70. During that period, Crude oil prices declined by 48 percent nearly equal to $55-and-below a barrel. This ought to convert into a solid rupee. However, the rupee continues falling regardless of the worldwide decrease in oil costs. What is the underlying driver of this issue? On the off chance that we can’t quit the deteriorating trend of the rupee, what substitute roads exist for us? India produces more than 10 lakh engineers in the world in various disciplines, then why wouldn’t we be able to accomplish something in this stream?
For thousands of years, all energy needs were met just by coal, wood, dried cow manure and so forth and other natural processes. Night lights used castor oil. The entire economy of India and Oriental nations were reliant on horticultural items. Cultivating was done by bullocks. Transportation was fun through waterways or steed-drawn trucks. The normal speed of such transportation was around 25-35 kilometres. Even a large number of miles ocean travel was finished by utilizing coal or oil made by packing coal. Economies were coal-based economies. India was net exporter and energy adequate.
The discovery of oil was controlled by British and US petroleum companies which then forced the third world to shift to oil-based economies from coal-based economies. This was the only way that the amount spent on energy, transport, lighting, the industry could be shifted to west from all other countries.
First, it was stated that coal and wood burning was polluting the atmosphere. What wasn’t told was that coal burning was there for thousands of years with no documented health effects at all. Oil was sold as pure clean energy. Once countries started using oil the pollution went through the roof and many lung and heart diseases started emerging. This helped medical companies in selling more medicines. The agricultural energy was replaced with hydro electrical energy leading to the creation of dams that submerged thousands of acres of fertile lands and the villages on them.
The most important query that we ought to solicit first is, how much does extracting oil actually cost? Except the bore well to extract the crude, oil costs nothing. It is a free national resource which is being extracted and then distributed. Until 1973 the cost of oil was $13-$20 dollars a barrel. In those days of oil extraction, circulation and discount were altogether done by single organizations. Now one of the biggest catches of a dollar-priced oil was the requirement of dollars, something that the only United States could fulfil. This resulted in a scenario where nations had to literally stand in line, palms outstretched in front of the US to buy dollars, making it the most powerful currency in the world. This, in turn, it became a favourable situation for the USA, which now could actually export its inflation overseas.
From 1971 multinational oil companies divided the oil business into extraction, transportation and distribution. Each separate entity added their own profit. This made oil prices jacked up by a factor of 3x. 300% rise in oil prices lead to a 300% rise in the dollar demand.
This extra profit is not part of oil cost, but it is to make more money for the same companies by dividing their operations. Then entered speculation in the oil trade. From the time the oil tanker leaves the Middle Eastern ports till it reaches New York or Houston in the USA, traders will take options on the tankers. This is like cricket betting or political betting. This jacks up oil prices by another $20 to $30 per barrel. At these prices, the oil is offered to all third world countries. This speculation is the cause of the rise of oil prices internationally. Whoever opposed this was labelled as terrorist nations and world plunged into endless wars. Iraq demanded money for oil in Euros, it was attacked. Iran created barter or gold-based oil bourse and it was about to be attacked lest there was fear that they actually have built up a nuclear arsenal. Similar was the fate of Libya.
The Bretton woods Agreement
Brilliant Plan to push world demand for dollars without American goods (war or civilian) sold. The US entered into an agreement with the Sheikhdoms of the Middle East in an uncharacteristic yet a masterpiece of an agreement which is called the Bretton woods Agreement. The terms of this agreement ensured that the sheikhdoms stay on for perpetuity, with the full backing of the US. The US in return would get $0.10 for every dollar they printed to sustain these Kingdoms’ demand for money to buy oil and US Dollar denominated terms.
This agreement also encouraged the Sheikhdoms who were pro-US, would trade in dollar terms instead of their local currencies and would do the bidding of the US. The benefit of getting into such an agreement was a boon to those desert landowners who now had a perennial source of money flowing into their coffers. This, in turn, led to the rise of a Wahabi brand of Islam, a fundamentalist form that plunged the whole Middle East and South Asia into an endless cycle of terrorism and violence, including India.
Oil = $ Only.
There are over 150 countries that are currently buying oil in dollar terms. As the demand for dollars increases, the US is happy printing more and more dollars to fulfill this insatiable demand. Now if this was done in some other country, i.e. the ruthless printing of currency to fulfill demand, it would have fallen under hyperinflation, just like the erstwhile Wiemar Republic and the current day Zimbabwe. This, however, hasn’t happened to the US because they’re transferring all this excess dollar across the world to support the demand of dollars for the oil trade and gaining a hefty commission for the same. Also, most countries are actually buying US dollars and holding them to support themselves in times of need. The dollar prices never rose since all of this dollar is backed by the gold standard by the US to keep the inflation within its borders in check.
The oil monarchies of the Middle East were getting billions of dollars through selling oil that was extracted by companies operating. Countries like Saudi Arabia, with no alternative economic sources of income at that time, became some of the biggest GDPs in the world due to the presence of oil in them. But just pumping in dollars into them for their crude would have been a bad move since that would’ve resulted in a country with more dollars than the US itself. So the decision to pump them with expensive war equipment was taken. The need was created by creating the State of Israel among all the Arab nations in the Middle East. This state was created by taking land away from the Sunni kingdoms in the Middle East after WWII and arming it to its teeth citing historical and religious connect. An armed Israel is considered dangerous by the Arab nations around, became a quintessential threat in their neighbourhood, sparking off an arms race, which again was fulfilled by the US.
The Arab Israeli wars were precisely what the US wanted, and they were happy to arm both of them to the teeth to get the printed dollars back into their own economy without stoking inflation. This further led to USSR joining in to protect its neighbourhood, a byproduct that the US itself was pleasantly surprised with.
Fisher doesn’t matter as long as it doesn’t.
As the 1980s came in and the Soviet influence waned on account of an economy on crunches, India started to shift ever so slightly into the American sphere of influence. More ideas were exchanged and collaborations were set up. One of the biggest imports which happened was the removal of the Fisher equation from Indian study books.
You see, Fisher’s equation was being used by the US themselves that time, albeit under Ronald Reagan’s administration, a deeply unpopular one, since he had moderated the circulation of currency in the country. Oil prices had fell. The US never wanted other countries to realize this and stop buying dollars off of them.This would have stopped the best way US could have moderated it’s inflation, which was in its highs.
The Fisher Equation is based on the premise that the amount of money in the system determines the inflation of the economy.
So with more money being printed, more inflation will follow since the value of money has a resource dwindles and that’s where the US of A decided that they didn’t need Fisher’s equation getting taught in Universities anymore. The US conspired to pump in a lot Fiat Money into the system. Fiat money is the currency which doesn’t hold any value of its own. It’s just a legal tender because the government said so. It’s not backed up by any commodity. An example of the same closer home is the notes that we have in the system. As soon as the PM announced demonetization, the notes which had high value till the time suddenly became worthless. The US pushed this Fiat currency abroad and made sure that the resultant inflation never enters their country’s shores. Since other countries were too blind in bowing down to US hegemony and with no knowledge of Fisher’s equation, no one could call out USA’s bluff here.
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation (the percentage rate at which the level of prices is rising in an economy). The consumer, therefore, pays twice as much for the same amount of the good or service.
In its simplest form, the theory is expressed as:
MV = PT (the Fisher Equation)
Each variable denotes the following:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services
It is built on the principle of “equation of exchange”:
Amount of Money x Velocity of Circulation = Total Spending
Thus, if an economy has US$3, and those $3 were spent five times in a month, total spending for the month would be $15.
The Americans quickly realized that Fisher Economics is a potential problem. A simple study and understanding of its laws were good enough to prove that what it was planning on doing wouldn’t work out in the long term. Hence, they removed the theory from the educational curriculum altogether, beginning a cycle of American greed, something that continued till the economy collapsed in 2008 under the weight of massive debts of the average American.
Post the collapse, they reintroduced it into the curriculum, albeit reluctantly. It was necessary that the US kept its inflation below 3% so as to attract investment and also to ensure the predominance of the US currency in the world economy. They did this by taking 2 steps: one, by getting on the US back on the gold standard and second, by printing petrodollars and circulating it amongst companies looking for them to export domestic inflation overseas. As petrol, kerosene and diesel are all part of transportation costs, the input price increases, directly transferring inflation to other countries around the world.