Petrol Price Hike & What Indian Stock Market Enthusiast Can Do!
Since the beginning of the year, we have constantly seen the fuel prices hitting a record high almost every single month. In 2021 alone, the fuel prices have surged more than 24 times. Petrol prices have crossed more than ₹100 per litre while Diesel prices have been inching past ₹90/litre.
And this is having a disastrous impact on the Indian consumers in 3 specific ways. Several industries like the transportation industry which has already suffered a lot due to COVID are being drastically affected. Inflation is creeping in at a disastrous 5.1% And most importantly considering the political instability in the Middle East we are at the brink of another recession And from here onwards if there is a sudden price hike from the Middle East it will put us into another economic crisis.
So, the question is- What is the government doing about it? How is it going to affect people like you and me? And most importantly from the investors standpoint, what are the factors that you need to keep into consideration in order to secure your investments in the stock market.
The answer to this question lies in something that happened in 1973 when the world was witnessing something called the first oil crisis. For those who don’t know In September 1960, a group of oil producing countries united together and formed an organisation called the Organization of Petroleum Exporting Countries or OPEC.
This included countries like Iran, Iraq, Kuwait, Saudi Arabia and Venezuala. And this organisation was formed in order to avoid competition amongst each other and to regulate the prices for more profit. Basically, an official cartel. And in 1973, the Arab-Israeli war broke out and long story short the US ended up supporting the Israelis and gave them supplies.
This made the Arabs angry and hence the Arabs decided to use their oil superpower and quadrupled the price of oil from just $3 a barrel to $12 a barrel! And when this happened there was a devastating impact on economies all across the world. And just like the pandemic the entire world witnessed a recession.
Millions of jobs were lost, inflation skyrocketed and every single industry faced the brunt of the oil crisis. But while all of this was happening there was one country that actually found a wonderful solution to this crisis and even presented the world with a revolutionary concept.
This country that I’m talking about is none other than Brazil. And the solution that they came up with was something called Ethanol Blending wherein a certain amount of ethanol is mixed with petrol fwhich decreases both the emissions and the consumption of petrol.
And the best part about ethanol was that it could be obtained from various sources like sugarcane, wheat, corn and even rotten potatoes. Therefore at the macro-level it could significantly reduce the dependence on oil imports. Now, in 1975, Brazil was facing 2 major problems. The first problem was the drastic effect of the oil crisis and secondly, in 1975.
Condition In Europe
While Europe started doing business with Africa the United States an alternative to sugar in the form of corn syrup. So, in order to tackle both these problems together on 15 November 1975 Brazil launched something called the Brazilian Ethanol Program that was dedicated exclusively for the production of sugarcane fuel ethanol.
And this program was established with 3 very important objectives in mind. Number one, to reduce the national dependence on oil imports. Number two, to promote technological and industrial development associated with ethanol production.And lastly to strengthen the sugarcane and sugar sectors. And guess what?
This was a game changer for the Brazilian economy. During this phase of the ethanol program the sugarcane production increased by 50% and ethanol production skyrocketed by 500% to 2.8 billion litres. At the same time the Brazilian government also started pushing and subsidizing auto companies to develop engines that were capable of running on 100% ethanol.
As a result in 1976, these efforts culminated to give birth to the first pure ethanol vehicle called the Brazilian Fiat 147. Meanwhile the foreign and domestic automakers, under the pressure from government, started manufacturing ethanol-only vehicles.
And within just 9 years, by 1985 96% of the vehicles sold in Brazil were ethanol powered vehicles and during this phase, the ethanol production again shot up by 400% to 12.8 billion litres. And all of this was being done with an underlying assumption that oil prices will never go down. And this is where the problem began
In 1986, the oil prices stumbled and within a year the ethanol vehicles became uneconomical as compared to petrol vehicles. And at the same time the sugar prices also recovered resulting into ethanol shortages which further increased the price of ethanol. And last and most importantly it further got messed up when the military dictatorship gave way to the civilian government and the transition eventually caused hyperinflation and other major economic difficulties.
Let us talk Facts!
The fun fact is, inspite of all this drama it is estimated that Brazil still saved $50 billion in oil imports from 1975-2002 due to ethanol blending. Therefore, in 2003 the ethanol program was again revived but this time with the introduction of something called the flex fuel vehicles.
Now, pay very close attention to what I’m saying over here. Flex fuel vehicles, as the name goes, are those vehicles that are flexible with different fuel ratios that is, they could take in pure ethanol they can take in pure gasoline and the mix of both also. These vehicles had sensors that could actually determine the fuel mix and adjust the operation of vehicle accordingly.
So, the government collaborated with international companies like General Motors and Volkswagen to ensure the flex fuel vehicles were competitively priced as compared to traditional gasoline vehicles. And fast forward to 2018, over 73% of the new passenger vehicles sold in Brazil were flex fuel vehicles which allowed the consumers to make the decision based on price factors as to which fuel they want to use at any given time.
Therefore FFVs resolved a major issue that led to the collapse in the consumer confidence in the late 1980s. Therefore this time, Brazil actually managed to achieve something incredible. Since 2003, Brazil’s carbon emissions have gone down by 515 million tonnes which is equivalent to taking out 112 million cars off road.
And most importantly they have significantly reduced their dependence on oil imports. This is the scenario of Brazil. If this is very very clear to you, now let’s talk about what all of this information has got to do with the Indian markets.
People, if you look at the scenario of India we are in a very similar state as that of Brazil in the 1970s. Firstly, just like Brazil in the 1970s even India is heavily dependent on oil imports. Currently, India is importing 80% of its oil from the foreign markets. Number two, just like Brazil as of 2021, we have humongous infrastructure for sugar and sugarcane. In fact for the 5th straight year, we will be producing sugar in surplus.
And as of 2020 alone, we had 6 million tonnes of sugar in surplus. Therefore there is a dire need either to utilise these resources or to decrease the production. And last and most importantly just like the 1970s tensions have been rising in the Middle East Iran and Israel are in a major conflict, the US is involved and as time passes by the situation is getting more and more intense which means what there is either a possibility of a price hike or even an oil crisis.
Therefore the Indian government urgently needs to de-risk the economy and take even giant leaps if necessary in order to protect the country from another economic crisis. Now, considering all of these scenarios, let’s have a look at the series of events that have happened in India and you’ll automatically be able to map the similarities between Brazil and India.
That’s all from my side for today guys. If you learnt something valuable please make sure to hit the like button in order to make YouTube baba happy and for more such insightful business and political case studies please subscribe to our blog. Thank you so much for reading. I’ll see you in the next one. Bye-Bye.