DAILY COLUMN – 16TH JUNE 2021

Oil Prices increase on account of slowing production

You’re likely to pay more for petrol and diesel in the coming days. US crude oil prices hit their highest mark in over two-and-a-half years, touching $71.78 a barrel on Monday. Many anticipate they may climb further.

Move towards Green: Big oil is stagnating. Spending on oil extraction and production is falling even as investors channel trillions of dollars towards green energy. According to research from Wood Mackenzie, the world spent $330 billion on oil extraction in 2020, less than half of what it spent in 2014. Renewable energy capacity, meanwhile, soared 45% in 2020 despite the pandemic, the largest annual growth rate in over two decades.

Experts believe that with the growing emphasis on climate change, investors are moving away from fossil fuels. The pandemic has already forced energy companies to cut back spending. Analysts believe oil production is unlikely to increase even if demand grows in the short run, and the mismatch with supply will likely keep prices high.

The other oil: Elsewhere, there is an edible oil crisis brewing. Commercial palm oil output is stressed as the world’s second-largest grower, Malaysia, battles a labour shortage. Extended lockdowns because of a third wave of Covid-19 in the country mean that production of palm oil, the world’s most popular edible oil, will be much lesser than anticipated. Lower supplies mean prices could be headed up.

Didi Chuxing’s Post-Covid Coming Out Party

Last week, Chinese mobility company Didi Chuxing filed to go public next month. Unsurprisingly, the IPO is expected to be among the largest in the tech sector this year, second only to Coupang which listed in March. According to a Reuters report, the company is expected to raise $10 billion while seeking a valuation of $100 billion. Its current valuation is at $65 billion.

News for the wrong reasons: The rape and murder of a Didi passenger by a driver in 2018 in Wenzhou had set back its IPO plans that year. Not only was its carpooling service suspended for nearly two years, it was also subjected to increased scrutiny from Chinese authorities. It was then valued at $56 billion. Didi, however, continues to face scrutiny amidst a wider antitrust crackdown by the Chinese government on big technology companies.

Other interests: The Didi of 2021 is not quite the same as the money-burning Uber challenger (and Ola’s mentor) of 2016. It has since evolved into a full-fledged mobility company, diversifying into intercity freight logistics, bike-sharing, on-demand grocery, and financial services for its drivers.

Didi has been planning the launch of China’s first robotaxi (autonomous taxis) — a vertical it has poured substantial capital into, besides partnering with leading auto manufacturers like Volvo. It is also betting heavily on electric vehicles.

Inflation continues to challenge the RBI

If your grocery bill is shooting up, do not be surprised. Retail prices rose at the rate of 6.3% and wholesale price inflation hit a record high of 12.94% in May. While high food and fuel prices led to retail inflation, the increase in the prices of manufacturing goods and petroleum contributed towards wholesale inflation. It may get worse in the coming months.

Supply bottleneck: As the brutal Covid-19 second wave abates and states cautiously open up, demand is likely to surge. However, supply may not match up to the demand. Logistics and supply chain networks have been disrupted and may take time to return to normal. Many workers who have returned to their villages may decide to stay back for the June-August Kharif sowing season, shrinking labour supply in industrial centres. Thousands of small enterprises have reportedly shut shop, which means a lot of manufacturing capacity has vanished.

Demand surge: International oil prices are rising and that will probably inflate fuel rates in India further unless the government cuts taxes. Already petrol retails at over INR 100 per litre in many places and diesel is in the mid-nineties. That will have a cost-push effect on the prices of goods. Middle-class consumers holding jobs have seen their bank balances rise due to lockdowns and lack of spending avenues. This pent-up demand might be released once establishments open up and movement is free. Consumer sentiment in rural India is also showing signs of improvement.

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