CAO Daily Editorial analysis for UPSC IAS 21st-December, 2017

Current Affairs Only Daily Editorial Analysis for Competitive Exams

21st Dec, 2017


The outlook for oil in 2018 {International Relations}

(The Hindu)

Oil price in 2016

The price of oil rose this year as the supply-cut agreement signed by the Organisation of the Petroleum Exporting Countries (OPEC) in 2016 managed to survive despite a lot of speculation otherwise. Brent crude oil trades at around $64 a barrel currently, which represents a gain of over 12%

It is notable that the price rise this year looks quite subdued compared to the rally last year which saw prices almost double after dropping below $30 in January. Still, the current price of oil is far from the historic highs, of well over $100,

The Organization of the Petroleum Exporting Countries (OPEC)

OPEC is a consortium made up of 13 countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC controls 40% of the world’s supply of oil. The consortium sets production levels to meet global demand and can influence the price of oil and gas by increasing or decreasing production.

In accordance with its Statute, the mission of the Organization of the Petroleum Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.

Why does price of oil fluctuate?

  • Like in the case of any other commodity, supply and demand determine the price of oil.
  • Natural disasters are another factor that can cause oil prices to fluctuate. For example, when Hurricane Katrina struck the southern United States in 2005, affecting 19% of the U.S. oil supply, it caused the price of a barrel of oil to rise by $3. In May 2011, the flooding of the Mississippi River also led to oil price fluctuation.
  • Production costs can also cause oil prices to rise or fall. While oil in the Middle East is relatively cheap to extract, oil in Canada in Alberta’s oil sands is a lot more costly. Once the supply of cheap oil is exhausted, the price of oil could conceivably rise if the only oil left is in the tar sands.
  • On the demand side, the shrinking of world money supply as central banks, particularly the U.S. Federal Reserve which supplies dollars used as currency in the oil market tighten monetary policy, will exert a downward pressure on the price of oil.

Effect on inflation

The new practice will add one more factor to the change in price of essential commodities such as food items, cereals, fruits and vegetables. The prices of essentials may fluctuate on a daily basis, if the mechanism of daily change in fuel prices comes into effect.

Books of accounts 

The price movement will immediately reflect on the book of accounts of oil marketing firms, allowing them to reduce or make provision for losses or profit arising out of sale and purchase of fuel on daily basis. Maintaining sales and cash receipts journals will become a lengthier process after due to daily change in prices of fuels.

Another tool of resolution {Economic Policy}

(The Hindu)

Why we need bank resolutions?

  •  They have become a repository of public faith in the financial system. So long as consumers have unrestricted access to deposits, their faith in the banking system is maintained. The fractional reserve system works on this faith.
  • The strong voices against the FRDI Bill seem to be ill-informed, as protecting the interest of depositors has all along been the topmost priority of RBI
  • The Bill brings in a system of risk-based monitoring of financial institutions. At the stage of ‘critical’ risk to viability, when the proposed Resolution Corporation takes the decision to use a particular method of resolution which includes the tool of a ‘bail-in’, it is the Corporation that takes all decisions, and not the bank.

Bail in

  • A bail-in is rescuing a financial institution on the brink of failure by making its creditors and depositors take a loss on their holdings.
  • A bail-in is the opposite of a bail-out, which involves the rescue of a financial institution by external parties, typically governments using taxpayer’s money.
  • Typically, bail-outs have been far more common than bail-ins, but in recent years after massive bail-outs some governments now require the investors and depositors in the bank to take a loss before taxpayers.

Safeguards in the law

  • On the larger issue of a bail-in and the threat to depositor money, among the most ignored provisions of the Bill are the safeguards to the use of bail-in tool. The Bill makes it explicitly clear that only such liabilities may be cancelled where the liability/instrument contains a bail-in provision.
  •  Even when liabilities are being bailed in, the Bill makes it incumbent upon the Resolution Corporation to follow the prescribed route. Here, uninsured depositors are placed higher over unsecured creditors and amounts due to the Central and State governments.
  • Lastly, the Bill gives aggrieved persons a right to be compensated by the Resolution Corporation if any of the safeguards have not been followed during a bail-in or in the conduct of any other resolution action.

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