Pipelines run through Georgia carrying oil, which is then transported by sea from port cities like Poti. According to experts, the Georgian pipelines pose a threat to the Russian stranglehold over the region’s fuel market.

The year 2005 witnessed the completion of the principal pipeline meant for carrying oil through Georgia, and sparked off jubilation in the United States which saw it as a major success in its foreign policy in terms of securing an alternative source of fuel. The construction of the pipeline meant that oil produced in Central Asia could be made available to the West, thus weaning it away from its dependence on the Arab countries. It also meant that the Americans could now ignore Russia for its oil needs- a much-cherished objective for the United States.

Bureaucrats in the United States who were responsible for framing policies were optimistic that circumventing Russia in terms of oil supply would deter the latter from reestablishing dominance over Central Asia and its stupendous oil and gas reserves. It could also mean a better and also less risky way of getting oil without interference from Moscow which had always maintained a vice-like grip over export channels- a legacy of the Soviet era. The tussle with Moscow seemed to be the modern version of a 19th-century competition for one-upmanship in the area, called the Great Game.

During the 1990s the American diplomats distributed advertisement material in the Central Asian region, which spearheaded US attempts to gain allies there, which carried the following message: “Happiness is multiple pipelines.” This message also summarized American strategic plans for the region.

Oil pundits express the opinion that a state of war between Russia and Georgia could jeopardize US efforts to tap into Central Asian energy resources at a time when record Asian oil demands coupled with diminishing supply jacked up fuel prices to oppressive levels.

“It is hard to see through the fog of this war another pipeline through Georgia,” according to Cliff Kupchan, who worked in the State Department during the tenure of Bill Clinton and who advised Eurasia Group in the realm of political risk-taking. “Moving forward, multinationals and Central Asian and Caspian governments may think twice about building new lines through this corridor. It may even call into question the reliability of moving existing volumes through that corridor.”

Experts fear that renewed Russian enthusiasm in taking control over the region’s geopolitics could play a significant role in fashioning the energy landscape there.

After the demise of the Soviet Union, during the 1990s, concerted American attempts were engineered by Bill Clinton in order to secure control over crude in the Caspian Sea. The Georgian pipeline, otherwise called the Baku-Tbilisi-Ceyhan line (BTC for short) marks a watershed in the positives of American strategic thought for the region which has never relented in trying to estrange the countries of Central Asia from Russia. These countries had earlier been under the Soviet regime before getting divorced from it when the USSR broke up.

Certain observers believe that hostile posturing between Russia and Georgia is not just an extension of their traditional rivalry, but is more an offshoot of Russia’s misgivings that Georgia, which is pro-West ideologically, could turn out to be a long-term competitor in the business of fuel exports.

“Russians treasured the fact they had a monopoly on oil and gas pipelines from Central Asia, as it gave them considerable clout,” observed Marshall I. Goldman, an expert on Russia at Harvard and who recently authored “Petrostate: Putin, Power, and the New Russia.” “By agreeing to having an oil pipeline, Georgia made itself more vulnerable.”

A major concern is about what will happen to Kashagan oil, Kashagan being a major oilfield in the Caspian Sea which oversees reserve oil to the tune of over 10 billion barrels. Situated close to Kazakhstan, Kashagan has been the theater of energetic activities by Western corporates, in recent years, in their endeavors to tap new sources of Caspian oil.

The overall scenario appears grim in the region as Russia flexes its military might against a pro-Western and less armed Georgia which might translate to a choking off of oil flow for the hapless importers. Thus one cannot expect, at least in the short to medium term, and unhindered supply of affordable oil from Central Asia. An ominous and unpleasant geopolitical game of one-upmanship patronized by an unrelenting Russia, laced with the specter of unnecessary bloodshed, is set to dash all hopes of doing business in the region by an oil starved West. Against such a backdrop, it appears that there is hardly much that one can do except continue to buy more expensive Middle Eastern oil.

On July 31 Moody’s Investors Service lowered the issuer rating of Indian Oil Corp Ltd (IOC) from Baa3 to Baa2. This translates to a stable rating pronouncement for IOC.

This action on the part of the agency comes in response to a significant fall in IOC’s profit margin as a result of ongoing regulatory controls in India. This has meant that the company cannot freely pass on the spiraling cost of oil to consumers. The steepening price of oil, despite alleviating measures undertaken by the Indian authorities, has had a markedly deleterious impact on the profit lines of companies such as IOC.

Moreover, the future years are likely to witness a further deterioration of the company credit profile, not least due to its considerable capex plan in the medium term.

“The sharp increase in global crude prices is leading to mounting under-recoveries for IOC and is expected to substantially increase the company’s need for funding to meet both working capital and capital expenditure requirements,” according to Ivan Palacios, who is the Assistant Vice President and main analyst for Moody. “Declining profitability and increasing borrowings to accommodate the capex plan will lead to deterioration in credit metrics, which will no longer be consistent with the previous rating,” Palacios goes on to add.

Despite steps initiated by the Indian government to address the losses being suffered by refineries owned by the state- like: increasing the monitored domestic fuel rates, slashing import duties on crude oil and reducing excise duties levied on gasoline and diesel, the domestic prices of fuel remain unforgivably below that dictated by the market. Additionally, returns from oil bonds can only partially shore up depleting bottom lines. Moody’s takes care to mention, also, that IOC suffers from an excessive preponderance of short-term debt, which is bizarre for a company looking for investment, more so in the current scenario. Fortunately, this has been somewhat counterbalanced by loyalty of the country’s banking system towards IOC. Further, the Reserve Bank of India (RBI) has pitched in to bail out these types of companies by snapping up oil bonds through its open market operations.

The rating accorded to IOC by Moody’s takes into consideration its underlying rating (that is, BCA) and also the latter’s anticipation of timely governmental support that the oil company is likely to be extended in case of impending financial collapse. But, in the final analysis, it is the fall of IOC’s BCA to 11 (comparably similar a Ba1 for Moody’s) which has precipitated the company’s final credit rating to slide to Baa3. According to Moody’s, IOC is likely to continue to receive governmental support, although it considers the degree of default dependence between the government and IOC (one of the factors in Moody’s JDA Methodology) to be “High” instead of “Medium”. The downgrading of IOC highlights the effect of growing subsidization of oil on governmental fiscal deficit, as also the accentuated strategic, political and social status of IOC in the eyes of the government in a scenario of uncertain oil price.

Moody’s consideration of IOC as a stable investment destination is an affirmation that the rating is not likely to weaken further in the near future, but a revision of such a rating may only be forthcoming in response to a noticeable shift in the rating accorded to the oil company by the Indian government. Taking into account the prevailing atmosphere of uncertainty in India, and climbing prices of crude, there appears to be a very paltry likelihood of the rating going up. However, if sustained subsidization of oil continues resulting in reduced financial hardships for IOC, so that the Cash Flow/Debt ratio is more than 20%-25% and the EBIT/Interest ratio is above 4x-6x on a persistent basis, there can be expected to be some upward movement of the rating.

Opposed to this, if RSF/Debt sinks below 5% and EBIT/Interest slides below 1.5x consistently, there could be a dip in the rating. Furthermore, if IOC’s cash position deteriorates as in case of hardships in getting buyers for its oil bonds, which could be a direct consequence of the RBI discontinuing its mopping up operations and with no alternative governmental action in sight, IOC’s rating could take a hit. Baa3 for IOC is, incidentally, at the same level as the currency bond rating of Indian government. If the latter rating starts going southward, so will be IOC’s rating.

All in all, IOC, which is owned 80.36% by the Indian government, doesn’t paint an all-too-pretty picture for the wary investor. How much investment it’s able to attract will be a matter of the future and its ability to present itself as a viable and profit-making concern that is not dependent on its existence by clinging to the apron strings of an indulgent government.

In consideration of the increasing oil prices which pose a substantial economic threat for sustaining growth and controlling food prices worldwide, finance ministers of G-8 countries have come out strongly favoring enhanced oil production, this strategy they hope will eventually curb the uncontrolled increase of prices and thereby stabilize fuel demands across the globe.

Finance ministers of G-8 countries constituting Britain, Canada, France, Germany, Italy, Japan, Russia and the U.S have recently concluded a two days brain storming session of talks in Osaka, Japan on ongoing trends of economic growth in view of the rising oil prices and increasing market demand for energy and food grains.

Terming the present situation as dangerous, the most powerful finance ministers of the world have appealed to the oil producing countries to boost productivity in order to avoid major economic crisis in very near future.

In a joint statement, they stated “We will remain vigilant and will continue to take appropriate actions, individually and collectively, in order to secure stability and growth in our economies and globally.” Simultaneously, they have also issued a warning saying “the world economy continues to face uncertainty and downside risks persist.”

Of course, market has seen a recent comeback after the great setback received from the U.S. housing fiasco and following credit crunch. But since the newly developed oil crisis, the world economy is once again facing “headwinds”, and this is giving rise to instability of the world economy.

The Osaka meet had expressed great concern regarding the deprecating economic front. “Elevated commodity prices, especially of oil and food, pose a serious challenge to stable growth worldwide, have serious implications for the most vulnerable and may increase global inflationary pressure,” stated reports.

Earlier, the United States, a major world economic player, had played a crucial role in averting the potential threat of dropping dollar values against the euro. Henry Paulson, the U.S. Treasury Secretary, had encouraged the possible intervention in the currency market for the best interest of U.S. economy saying, “…a strong dollar is in our nation’s interest.” Incidentally, the dollar saw an immediate comeback after the strong stand taken by the U.S.

However, there are many questions as to how exactly the U.S. plans to combat the challenges imposed by the short supplies of oil and food grains. Paulson has already warned against imposing of any “short-term solutions”, as that will not help fighting oil crisis in the long run.

The primary reason for the ongoing economic “headwinds”, as observed in the recent Osaka meet is the imbalances created out of the tight supplies of oil against the high market demand. Some ministers present in the meet had also expressed concern over the volatile geopolitical scenario and termed the same as major cause for the steep rising of oil prices. Another factor that has contributed greatly in the increasing oil prices is the weaknesses recently observed in the U.S. dollar. Although the dollar has recovered, the oil prices and food crisis continues to grow, giving a new challenge to the world leaders, particularly those present in the G-8 countries.

According to Paulson, the oil production capacity of the world has not changed for the last ten years while cost of oil has increased five times since 2002. Watching the trend, he has advised the lowering of government subsidies on oil and urged all oil producing countries to make higher investments in locating new oil fields and oil production. Warning against considering the problem as “the speculators’” view, Paulson has added, “We don’t want to misdiagnose the problem. And if you look at the problem, I think it’s pretty clear. We have not had an increase in production capacity in oil for the last 10 years.”

In spite the high pressure to increase oil supplies, Chakib Khelil, president of the Organization of Petroleum Exporting Countries (OPEC), has not revealed any ray of hope for immediate relief as far as the meeting of the high oil demands are concerned. Though rumors have it that Saudi Arabia may soon start producing an extra 500,000 barrels per day taking the country’s oil production to 10 million barrels a day.

After the fourth straight week of higher stock prices, investors are flying a little high. Several major companies reported earnings during the week of April 30-May 4 and rumors began circulating of major takeovers. One such takeover includes Microsoft and makes them appear to have an “if you can’t beat them, join them” attitude. This perceived attitude follows Yahoo’s recent announcement to purchase Right Media, which coincidentally follows Google’s purchase of Doubleclick. It is rumored that Doubleclick was originally courted by Microsoft before agreeing to Google’s purchase offer. These Microsoft rumors along with other take over news, helped stocks to rise and end on a high note. While investors are enjoying this bounce in the stock market, several economic and earnings reports are due out this week as well as whether or not the Federal Reserve will adjust the interest rate. On May 9, the Federal Reserve will meet to decide whether to lower, raise, or leave the interest rate alone. The present interest rate has stood still since last summer, but some investors are hoping that the Federal Reserve will cut interest rates in order to encourage spending. While there is hope among investors, many experts believe the Federal Reserve will allow the interest rate to remain where it is.

The reports that came out last week did indicate that the economy is growing at a snail’s pace, but investors are still worried about soaring prices. The other economic reports due out this week will help investors and experts alike, paint a more complete picture of the economy and these reports will without a doubt influence the stock market. On Monday, May 7 at 3:00 pm the Federal Reserve is scheduled to release the March consumer credit report. It is predicted that this report will show consumer credit increased by approximately $2.1 billion dollars since February. Aside from the very busy week that the Federal Reserve obviously will be having, the Commerce department will be having an equally busy week. The Commerce department is expected to report on wholesale inventories, import/export prices, and business inventories. All three reports are predicted to have increases from the previous report, especially the import/export pricing report which is predicted to have a $1.6 billion increase.

Not to be left out of the action, the Labor Department is scheduled to release the Producer Price Index (PPI) on Friday, May 11. The PPI is an indicator of wholesale price inflation. The Labor Department will report on the PPI and the core PPI. The PPI is predicted to have a .7% increase in April while the core PPI, which will ignore the price for food as well as energy, is predicted to have a .2% increase.

While all of these economic reports will have a bearing on the stock market for the upcoming week, so will several major companies who are scheduled to give their earnings report. On Tuesday CVS/Caremark Rx Corporation, the Walt Disney Company and Cisco Systems, Incorporated are scheduled to release their earnings. It is believed that both Disney and Cisco will have promising news concerning their previous quarter’s profits. On Wednesday, Toyota Motor Company will take its turn reporting. It too is expected to have good news for their investors. The dawn of Thursday will see some of the nation’s largest retailers release their sales figures for April. Currently there are few predictions as to what these figures will be.

Basically, the long and short of the market prices is that investors need to hold on tight because while the stock market has seen some growth in the last few weeks, the upcoming economic and earnings reports could make some a little uneasy and therefore make the market falter some this week if not into the next few weeks.

One of the main problems being discussed in the US recently is the problem of underfunded pensions and sky rocketing benefit expenses. Old line American companies (the same is true elsewhere is G8 countries) are now burdened with pension costs that their competition does not have, but these cost are higher their obligations have went on longer than these plans had allowed for.

It really doesn’t matter if the companies poorly planned, or the insurance/investment industry mis advised, but there are at least problems that will become painfully obvious in the days ahead. First, old line companies, burdened by benefits are uncompetitive with their newer or less obligated competition. Second, a society that ignores social services and leaves it to business, will either have a failing social systems or failing businesses. Society need to establish government funded safety nets that work to make life in a world of temporary jobs, managable and rewarding to both the worker and investors.

Imagine a US where employers paid only hourly wages or salaries employees, no additional employment taxes or benefits, just a flexible labor force. This is the best way to help business compete against remote nations and their cheaper labor, right here at home. Imagine, a simplified, flat tax on indiduals with household and personal exemptions, generates the money for a social system, that trains and maintains a flexible workforce, for a newly unburdened and engergized business sector.

ah, the dream continues.