Philip Tetlock

Oil Prices Are Rising Again: What Will Modi Govt Do Now?

narendra_modi

In a little over a week, the Narendra Modi government will complete two years in office. The finance minister Arun Jaitley, has already started to give interviews in the media, highlighting the success of the Modi government on the economic front. The Vice Chairman of the NITI Aayog, Arvind Panagariya, has written columns around the same, as well.

What both of them haven’t really talked about is the oil price and its dramatic fall, during the time the Modi government has governed India. On May 26, 2014, the day Modi was sworn in as the prime minister, the price of Indian basket of crude oil was $ 108.05 per barrel. Nearly two years later, as on May 16, 2016, the price of the Indian basket of crude oil stood at $46.18 per barrel.

Interestingly, it even touched a low of $26.95 per barrel on February 12, earlier this year. This was a massive fall of 75%. The point being if this hadn’t happened, the finances of the Modi government would have gone for a toss totally. The petroleum subsidy number fell from Rs 92,000 crore in 2013-2014, to a little over Rs 60,000 crore in 2014-2015, to around Rs 30,000 crore in 2015-2016. For 2016-2017, around Rs 27,000 crore has been budgeted for the petroleum subsidy.

The government benefitted on two counts. First, it got a lower petroleum subsidy bill. Second, it captured a large part of this fall in oil price by increasing the excise duty on petrol and diesel. Between November 2014 and now, the excise duty on oil and petrol, has been increased nine times.

The total excise duty collected by the government on petrol and diesel in 2014-2015, had stood at around Rs 1,56,000 crore. This jumped by 59% to a little over Rs 2,48,200 crore in 2015-2016. Hence, lower oil prices were of huge benefit to the government. The state governments also cashed in by increasing the value added tax on petrol and diesel.

By doing this, the fall in the price of oil wasn’t passed on to the end consumers. The trouble is that now oil prices have started to go up again. Between February and mid-May, the price of the Indian basket for crude oil has gone up by more than 71%. As on May 16, 2016, it quoted at $46.18 per barrel.

In a scenario of falling oil prices, the government did not pass on the entire fall in oil prices to the end consumer. Hence, in a scenario of rising oil prices it shouldn’t pass on the entire increase to the end consumer as well by cutting down the excise duty on petrol and diesel. That will be a fair thing to do.

In an ideal world, the Modi government should have freed up the price of petrol and diesel totally, and let the international price of oil, decide the market price of petrol and diesel. If they had done that people would have adjusted to the idea of high oil prices, given that they would have seen low oil prices as well.

But that hasn’t turned out to be the case. The price of oil now is 57.3% lower than it was in May 2014. But the price of petrol and diesel has fallen by 17.4% and 12.9% only, in Mumbai.

Also, it is important to remember here that high oil prices can end up screwing the accounts of the government. This is simply because the government still subsidises the sale of cooking gas as well as kerosene oil.

Further, what does the government plan to do if oil prices continue to go up? If the government continues to raise petrol and diesel prices, I am sure there is going to be a public outcry.

This will happen simply because last time around when oil prices really went up, the end consumer did not have to pay for higher petrol and diesel prices. The oil marketing companies, the oil producing companies and the Manmohan Singh government bore the brunt of high oil prices. The consumer did not. This ended up screwing up the finances of the government.

Also, this time around the Modi government has benefitted tremendously from lower oil prices by raising excise duty on petrol and diesel. It had a tremendous opportunity to move towards a market driven price of petrol and diesel. But if it did that, it would have had to look for alternative sources of revenue.

It would no longer be possible for it to continue financing loss making public sector enterprises. This would mean that some ministers would have become totally jobless. It would have had to sell more shares in profitable public sector enterprises and so on. It would also have to look at ways for cutting down on frivolous expenditure that almost all governments indulge in. It would also have to sell its shares in the cigarette maker ITC, which it strangely continues to hang on to.

Of course, all these would have been difficult decisions and the government chose to latch on to the low hanging fruit of raising excise duty on petrol and diesel. A huge opportunity was missed out on.

Further, what is the government’s view on higher oil prices? As finance minister Arun Jaitley said in an interview to The Economic Times recently: “You see as far as the oil prices are concerned, this is one area where nobody has been able to predict, even reasonably what is going to happen. It is only after the event that people analyse what has happened. When the prices were close to a $120, nobody really thought that they will come down below 30. At 30, they said it would stabilise at 40, now it is 50.”

What Jaitley said was that oil prices cannot be predicted. This is a view that I have often maintained in the past. Nevertheless, after saying this, Jaitley went on to do exactly the opposite i.e. he tried to predict oil prices. As he said: “I think they are still range bound. And being range bound they are within the limits of what India can consider to be affordable and therefore unless there is some very alarming increase, which does not look likely at the moment, I think we are reasonably comfortable.”

So Jaitley feels that there are no chances of any alarming increase in oil prices. He said this after explaining in detail that no one can predict oil prices. This prediction came after oil prices have risen by 71% in a little over three months.

As Philip Tetlock and Dan Gardner write in Superforecasting—The Art and Science of Prediction: “Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

While, the government and those who run the government may not be able to predict oil prices, it is important that they think through what they plan to do if oil prices do continue to go up. This becomes especially important given that they did not pass on the fall in oil prices to the end consumer. Also, they are well and truly addicted to all the easy money coming in from raising the excise duty on petrol and diesel.

What is the Plan B of the Modi government? And more specifically, do they have one?

The column originally appeared in the Vivek Kaul Diary on May 18,2016

Experts are bad at forecasting: Remember this, next time you see a forecast

forecast
If I ever have the time, the money and the resources, I would like to carry out an experiment. Every day on business TV channels, experts offer their forecasts on stock prices, commodity prices, the direction of the economy, politics of the nation and so on.

There are other experts making forecasts through research reports. As the British economist John Kay writes in Other People’s Money: “Most of what is called ‘research’ in financial sector would not be recognised as research by anyone who has completed an undergraduate thesis.”

Getting back to the topic at hand, I would like to figure out how many of these forecasts eventually turned out to be correct. So, if an analyst says that he expects the price of HDFC Bank to cross Rs 1300 per share in a year’s time, did he eventually get it right.

Also, I would like to figure out whether the “so-called” forecasts were forecasts at all, in the first place? Saying that the HDFC Bank stock price will cross Rs 1300 per share, but not saying when, is not a forecast. As Philip Tetlock and Dan Gardner write in their new book Superforecasting—The Art and Science of Prediction: “Obviously, a forecast without a time frame is absurd. And yet, forecasters routinely make them.”

When it comes to the stock market, there are two kinds of experts who come under this category of making a forecast without a time-frame attached to it. One category is of those who keep saying that the bull market will continue, without really telling us, until when. “Predicting the continuation of a long bull market in stocks can prove profitable for many years—until it suddenly proves to be your undoing,” write Tetlock and Gardner.

The second category is of those who keep saying that the bear market is on its way, without saying when. “Anyone can easily “predict” the next stock market crash by incessantly warning that the stock market is about to crash,” write Tetlock and Gardner.

The broader point is that no one goes back to check whether the forecast eventually turned out to be correct. There is no measurement of how good or bad a particular expert is at making forecasts. I mean, if an expert is constantly getting his forecasts wrong, should you be listening to him in the first place.

But no one is keeping track of this, not even the TV channel.

As Tetlock and Gardner write: “Accuracy is seldom even mentioned. Old forecasts are like old news—soon forgotten—and pundits are almost never asked to reconcile what they said with what actually happened.” And since no one is keeping a record, it allows experts to keep peddling their stories over and over again, without the viewers knowing how good or bad their previous forecasts were.

“The one undeniable talent that talking heads have is their skill at telling a compelling story with conviction, and that is enough. Many have become wealthy peddling forecasting of untested value to corporates executives, government officials, and ordinary people who never think of swallowing medicine of unknown efficacy and safety,” write Tetlock and Gardner.

In fact, in the recent past, many stock market experts were recommending midcap stocks. After the Sensex started crashing the same set of experts asked investors to stay away from midcap stocks as far as possible.

There is a great story I was told about an expert, who was the head of the commodities desk at one of the big brokerages. He was also a regular on one of the television channels as well. This gentlemen kept telling the viewers to keep shorting oil for as long as prices were going up and then when the prices started to fall, he asked them to start buying. This was exactly opposite of what he should have been recommending. Obviously anyone who followed this forecast would have lost a lot of money.

I can say from personal experience that predicting the price of oil is very difficult, given that there are so many factors that are at work. As Tetlock and Gardner write: “Take the price of oil, long a graveyard topic for forecasting reputations. The number of factors that can drive the price up or down is huge—from frackers in the United States to jihadists in Libya to battery designers in Silicon Valley—and the number of factors that can influence those factors is even bigger.”

Nevertheless, the television appearances of the commodity expert I talked about a little earlier, continue. And why is that the case? Tetlock and Gardner provide the answer: “Accuracy is seldom determined after the fact and is almost never done with sufficient regularity and rigor that conclusions can be drawn. The reason? Mostly it’s a demand-side problem: The consumers of forecasting—governments, businesses, and the public don’t demand evidence of accuracy. So there is no measurement. Which means no revision. And without revision, there can be no improvement.” And so the story continues.

One would like to believe that forecasts are made so that people can look into the future with greater clarity. But that is not always the case. Some forecasts are made for fun. Some other forecasts are made to fulfil the human need to know what is coming. Some other forecasts are made to advance political agendas.

And still some other forecasts are made to comfort people “by assuring [them] that their beliefs are correct and the future will unfold as expected,” Tetlock and Gardner, point out. Now only if it were as simple as that.

In fact, Tetlock spent close to two decades following experts and their forecasts. In the experiment, Tetlock chose 284 people, who made a living by predicting political and economic trends. Over the next 20 years, he asked them to make nearly 100 predictions each, on a variety of likely future events. Would apartheid end in South Africa? Would Michael Gorbachev, the leader of USSR, be ousted in a coup? Would the US go to war in the Persian Gulf? Would the dotcom bubble burst?

By the end of the study in 2003, Tetlock had 82,361 forecasts. What he found was that there was very little agreement among these experts. It didn’t matter which field they were in or what their academic discipline was; they were all bad at forecasting. Interestingly, these experts did slightly better at predicting the future when they were operating outside the area of their so-called expertise.

It is well-worth remembering these lessons the next time you come across a forecast. And that includes the forecasts made in The Daily Reckoning as well.

The column originally appeared on The Daily Reckoning on October 7, 2015

Why Montek has a turkey problem while forecasting

Deputy-Chairman-Planning-Commission-Montek-Singh-Ahluwalia
Vivek Kaul
How the mighty fall.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, is now talking about the Indian economy growing at anywhere between 5-5.5% during this financial year (i.e. the period between April 1, 2012 and March 31, 2013).
What is interesting that during the first few months of the financial year he was talking about an economic growth of at least 7%. In fact on a television show in April 2012, which was discussing Ruchir Sharma’s book Breakout Nations, Ahluwalia kept insisting that a 7% economic growth rate was a given.
Turns out it was not. And Ahluwalia is now talking about an economic growth of 5-5.5%, telling us that he has been way off the mark. When someone predicts an economic growth of 7% and the growth turns out to be 6.5% or 7.5%, one really can’t hold the prediction against him. But predicting a 7% growth rate at the beginning of the year, and then later revising it to 5% as the evidence of a slowdown comes through, is being way off the mark.
And when its the deputy chairman of the Planning Commission who has been way off the mark with regard to predicting economic growth, then that leaves one wondering, if he has no idea of which way the economy is headed, how can the other lesser mortals?
Forecasting is difficult business. The typical assumption is that those who are closest to the activity are the best placed to forecast it. So stock analysts are best placed to forecast which way stock markets are headed. The existing IT/telecom companies are best placed to talk about cutting edge technologies of the future. Political pundits are best placed to predict which way the elections will go and so on.
But as we have seen time and again that is not the case. Surprises are always around the corner.
One of the biggest exercises on testing predictions was carried out by Philip Tetlock, a psychologist at the University of California, Berkeley. He asked various experts to predict the implications of the Cold War that was flaring up between the United States and the erstwhile Union of Soviet Socialist Republic at the time.
In the experiment, Tetlock chose 284 people, who made a living by predicting political and economic trends. Over the next 20 years, he asked them to make nearly 100 predictions each, on a variety of likely future events. Would apartheid end in South Africa? Would Michael Gorbachev, the leader of USSR, be ousted in a coup? Would the US go to war in the Persian Gulf? Would the dotcom bubble burst?
By the end of the study in 2003, Tetlock had 82,361 forecasts. What he found was that there was very little agreement among these experts. It didn’t matter which field they were in or what their academic discipline was; they were all bad at forecasting. Interestingly, these experts did slightly better at predicting the future when they were operating outside the area of their so-called expertise.
People get forecasts wrong all the time because they are typically victims of what Nassim Nicholas Taleb in his latest book Anti Fragile calls the Great Turkey Problem. As he writes “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief – right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.”
When Ahluwalia insisted in late April 2012 that the economy will at least grow at 7% he was being a turkey. He was confident that the good days will continue, and was not taking into account the fact that things could go really bad. As Ruchir Sharma writes in Breakout Nations a book which was released at the beginning of this financial year “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
In fact, expecting a trend to continue, is a typical tendency seen among people who work within the domain of finance and economics. As a risk manager confessed to the Economist in August 2008, “In January 2007 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.”
Given this, it is no surprise that people who were working in the financial sector on Wall Street and other parts of the world, did not see the financial crisis coming. This happened because they worked with the assumption that the good times that prevailed will continue to go on.
Taleb calls the turkey problem “the mother of all problems” in life. Getting comfortable with the status quo and then assuming that it will continue typically leads to problems in the days to come. That brings me to Ahluwalia’s new prediction. “I would not rule out 7% next year”. He continues to be believe in the number ‘seven’. How seriously should one take that? As hedge fund manager George Soros writes in The New Paradigm for Financial Markets — The Credit Crisis of 2008 and What It Means “People’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole.”
For the current financial year Ahluwalia as someone who closely observes the economic system could not comprehend the ‘whole’. Whether he is able to do that for the next financial year remains to be seen.
The article originally appeared on www.firstpost.com on February 18, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])