Apples and oranges should not be compared. And when they are, the results can be misleading. Notwithstanding that, I am going to make such a comparison, focusing on the links between the financial crisis in the West and the burgeoning debt position of the public sector oil companies IOC, BPCL and HPCL. I realize that I could be accused of trivialising the former and exaggerating the latter. That is clearly not my intent. I know that the West has been hit by an unprecedented financial tsunami which has already reshaped Wall Street and which may well redefine the ideological underpinnings of the capitalist system. The tsunami will one day recede but its consequences will be global, radical and long lasting. I also know that by contrast the oil companies face no more than a localised (albeit perhaps from their perspective, thunderous) downpour. Their exposure to Indian banks has grown alarmingly and their management must wonder how they will ever redeem this debt, but the amounts involved do not at least for the present, pose a systemic risk. Were corrective steps taken now, the financial consequence need be no worse than an uncomfortable drench. I make the comparison because there are some similarities(albeit tenuous) but more so because I want to draw attention (even at the risk of exaggeration) to the potential consequences of our current petroleum product pricing policy.

The financial jargon of mortgage-backed securities, collateralised debt obligations, credit default swaps etc tends to obscure a simple fact. The present crisis has occurred because the ‘Masters of the Universe’ in Wall Street forgot that the business cycle cannot be wished away through mathematical brilliance and financial sleight of hand. Markets do rise but they will also inevitably fall. There is no inexorable one way bet. The Masters forgot this fundamental when they looked at the US housing market. They assumed that house prices would only go up and that housing loans were therefore a secure bet. Were the borrowers to default the house would be ‘possessed’ and sold at a profit. Such was their conviction that they extended loans to people with no income, no jobs and no other assets (the ‘ninja’ borrower); they allowed borrowers to repay only the interest charges and they ‘sliced and diced’ the loans for sale to others equally confident in the linearly upward trend in house prices. They all got it horribly wrong. The housing market did collapse; the borrowers did default; the collateralised homes could not be sold and the lenders found themselves saddled with “toxic” assets that they did not have the capital to support. The consequence: a liquidity and credit crunch not felt since the Great Depression of 1929.

... contd.