The lovely tale of Liquor
during Lockdown and before
At every stage, addiction is driven by one of the most powerful, mysterious, and
vital forces of human existence. What drives addiction is longing —
a longing not just of brain, belly, or loins but finally of the heart.
Cornelius Platinga
The use of alcohol in India for drinking purposes dates back to somewhere between 3000 and 2000 BC. An alcoholic beverage called Sura which was distilled from the rice was popular at that time in India for common men to unwind at the end of a stressful day. . Yet the first mention of Alcohol appears in Rig Veda (1700BC). It mentions intoxicants like soma and prahamana. Although the soma plant might not exist today, it was famous for delivering a euphoric high. It was also recorded in the Samhita, the medical compendium of Sushruta that he who drinks soma will not age and will be impervious to fire, poison, or weapon attack. The sweet juice of Soma was also said to help establish a connection with the gods. Such was the popularity of alcohol. Initially used for medicinal purposes, with time it evolved and became the beverage that brought life to social gatherings, and eventually consuming alcohol has become a habit for many.
With such a rich history of not just humans but also of the gods,
what is a worldwide pandemic to stop anybody from drinking?
. . .
According to a report released by the World Health Organisation (WHO) in 2018, an average Indian drinks approximately 5.7 liters of alcohol every year. In a population of casual and excessive drinkers, with the shutters of liquor stores down, it must have been extremely difficult for “certain” people to survive lockdown. In the first two phases of lockdown, the desperation had quadrupled prices of alcohol in the Grey Market of India. Also, According to Google Trends, online searches for “how to make alcohol at home” peaked in India during the fourth week of March, which was the same when the lockdown was announced. As a consequence, a few people died drinking home-brewed liquor. People committed suicide due to alcohol withdrawal syndrome. Owing to the worsening situation and to reboot the economy, some states decided to open licensed liquor stores in the third phase of the COVID-19 Pandemic lockdown in India. This decision was the worst best decision the state governments could take. The kilometer-long queues in front of liquor stores were evidence that a pandemic can turn your life upside down yet your relationship with alcohol cannot move an inch.
The love in the hearts of those who are addicted was explicit. We might have seen addiction, we might have witnessed desperation but what happened in the month of May was madness, not just in terms of the way people pounced but also in the way the government earned. According to a report by Hindustan Times, on the first day of the third phase of Lockdown, the Indian state of Uttar Pradesh recorded a sale of over Rs 100 Crore from liquor. On the second day of the reopening of Liquor stores, Karnataka reported sales of 197 crores in a single day which was the largest ever. Eventually, the prices of Liquor were hiked to 100% to discourage people from drinking.
. . .
There was a special corona fee that was imposed in Delhi by Chief Minister Arvind Kejriwal. A 70% corona fee was imposed in Delhi, yet the sales did not drop. The entire situation was a disaster for the law enforcement officers, social distancing was easily abandoned and a basic code of conduct was happily violated. Despite the chaos created, the states continued to collect revenues. Home delivery of alcohol was allowed in Maharashtra and e-tokens were sold in Delhi.
Demand for liquor is inelastic which means that
the sale of alcohol is not much responsive to change in prices.
In general, since alcohol policy is a state subject in India, revenue from Liquor is a cash cow for state governments. In 2018 and 2019, four states collectively collected about 20,000 crores in taxes from the sale of liquor. As much as the state earns from the sale of Liquor it is undoubtedly, a threat to the Economy. Consumption of alcohol has dire health consequences. When a person consumes an alcoholic beverage, there is a rise in BAC because of which there is a gradual and progressive loss of driving ability because of an increase in reaction time, overconfidence, degraded muscle coordination, impaired concentration, and decreased auditory and visual acuity. This is known as drunken driving. (V. M. Anantha Eashwar, 2020) Drunken driving is the third biggest cause of road accidents and over speeding in India. Road accidents are not it; alcoholism causes sleep problems, heart, and liver issues. Also, it is not about an individual’s life, it ruins the lives of all people concerned.
Addiction also causes economic loss. In 2000, Vivek Benegal and his team assessed 113 patients admitted to a special de-addiction service for alcohol dependence. They found that
the average individual earned a mean of ₹1,661 but
spent ₹1,938 per month on alcohol, incurring high debt.
They also found that 95% did not work for about 14 days in a month. They concluded that it led to a loss of ₹13,823 per person per year in terms of foregone productivity. A more recent study, Health Impact and Economic Burden of Alcohol Consumption in India, led by Gaurav Jyani, concluded that alcohol-attributable deaths would lead to a loss of 258 million life-years between 2011 and 2050. The study placed the economic burden on the health system at $48.11 billion, and the societal burden (including health costs, productivity loss, and so on) at $1,867 billion. “This amounts to an average loss of 1.45% of the gross domestic product (GDP) per year to the Indian economy,” the study said. (Mint, 2020)
Setho ka Gaon
With each passing day, the ‘curtain of separation’ weighs down on the women of Afghanistan, paving the way for tyranny to thrive.
Arth
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A Retrospective: The Grand Oil Machinery Of The 70’s
Setting the Stage
Oil. A stinging resource that has captured the zeitgeist for eons and bought itself a lofty yet precarious position in the Macroeconomic lexicon. We have had wars waged, political strategy calibrated and economic power-plays staged around ‘oil’. Years of unambiguously flawed political warfare masquerading as “policy decisions” have all ended in one big naught. Thus it's perplexing, to say the least, that globally we are yet to accurately reconcile with the damaging repercussions of playing with fire.
The chart mapping oil prices over the breadth of two centuries lays clear the ups and downs in oil prices that have arisen out of turbulences across the world. Right from the sharp rise in prices during the US Civil War in the 1860s to the steep fall in the 2010s due to global oversupply, prices have swung to extremes in different time periods. Our focus is going to primarily lie on dissecting the crises of the 1970s both economically and politically; the intent is to reflect the overbearing power of cartels, elucidating a framework for analyzing the role of individual countries (Saudi Arabia in particular) and the concluding with a coherent takeaway for future price wars in the global oil arena.
Notes on Crises
On September 14, 1960, five oil producing countries [Iran, Kuwait, Qatar, Saudi Arabia, and Venezuela] that accounted for 80% of world crude oil exports, met together at the Baghdad conference. Till the early 1960s, the “Seven Sisters”, the major oil companies of the world controlled 86% of the oil produced in OPEC countries. The governments, especially of Middle east, were enraged by the frequent cuts in oil prices by major western corporations and he quotas imposed on imports- August 1960 saw as further depression in prices due to slash cuts by the West. An alliance was formed for ensuring efficient price discovery, bringing cohesion in the oil market and safeguarding interests to prevent a further depletion in prices. OPEC was born.
It’s worth noting that initially OPEC had minor to no influence until the political turbulence in Libya and Iraq raised its stature on the world stage. This led to the Tehran and Tripoli Price Agreements of 1971. The agreements signed between the bloc and 22 Oil Companies (of Iran and Libya) postulated that the rebalanced profit sharing ratio would be 55:45 and refuses to allow foreign oil companies to deal with the organization. The members of OPEC had already begun nationalizing the oil industry ever since its inception in 1960, which gave them significant bargaining power in price-setting. 7% was the proportion of world’s oil reserves that international oil companies had access to by the end of the 1970s, a staggering fall from 85% in the late 1960s. A decade of cartelism was earlier derided as “insignificant” ; now, the West saw their influence waning in unprecedented ways.
“Drain America First” Policy :
The late 60s perturbed American policy makers. Oil production had “peaked” in the words of the Hubbert theory, and it could not keep pace with the burgeoning pace of consumer demand growth. President Eisenhower’s administration imposed quotas on the import of oil in 1953, a decision that would carry on till 1973. The Program termed the Mandatory Oil Quota Program was constituted with the sole aim of reducing dependence on foreign oil-producing counterparts and placing an enhanced degree of focus on domestic oil. Ill-fated as it was, it not only reduced domestic production to 16% of global output but also laid the groundwork for accentuating the effects of oil shocks.
As soon as Nixon claimed the cabinet in 1969, he set up a review committee looking into the policy and ultimately scrapped the same in 1973. Oil imports, representing about 30 % of U.S. consumption in 1973, increase to nearly 50 % within four years.
Politics, Arab-Israel Tensions, and the Weaponisation of Oil :
Leveraging Oil to influence polity and global economics has been a mainstay in the strategic warfare enacted by Arab oil-producing countries. October 6th, 1973 saw the eruption of pandemonium. Israel was attaked by Egypt and Syria on the Jewish holy day of Yom-Kippur. Some members of the Arab coalition OPEC vehemently supported the use of oil for political strategy against the proponents of Israel. Saudi Arabia, on the other hand, had been a stringent supporter of separating oil from politics. The Saudis were wary of the tactic due to the availability of oil from non-Arab oil producing countries, primarily due to the growing dependence on Western support to ensure their continued survival as Nasser of Egypt gained significant popualrity. However, this time was different. Contrary to the $850 Million aid requested by Israel from USA, President Nixon sanctioned a whopping $2.2 Billion military package. King Faisal of Saudi Arabia consented to the embargo.
The results were catastrophic. The embargo reduced traded oil supplies by 14 percent internationally. Gasoline prices in the United States increase as much as 40 percent within a few months. Consumers in Europe, Japan, and the United States began to panic over oil shortages. Hours-long lines at gas stations form across the United States as people started to hoard gas supplies following gas rationing and price controls.
War and Oil :
The Iranian Revolution added salt to the already-grave wounds of an Oil-fractured global economy. In October 1978, oil workers went on a strike against the leader Mohammed Reza Shah. Oil output in Iran fell from more than 5 million barrels a day to zero by December—leading to about a 5% loss in global production. When 63 Americans weld held hostage by Iranian students in the Iranian Embassy, President Carter swiftly cuts all ties with Iran and its oil. Prices jumped by more than two times between January and December of 1979. The decade ends with Carter announcing energy conservation measures, phasing-out price controls and signing the Energy Security Act, which sought to develop alternative energy resources for the future. In a searing admonishment, Carter chided Americans for “worshiping self-indungence, consumption and having a Crisis of confidence” .
In the Intersection of Economic Theory, OPEC & Saudi Arabia
If there is one takeaway from this crisis that’s worth pondering, it’s the extent of Saudi Arabia’s influence in OPEC. History indicates that Saudi Arabia has clearly influenced the oil market since 1974 through different means. Several scholars have attempted to analyse this in stunning detail using models and econometric analysis. Our present intent is to focus on the models of Geroski et al. (1987) and Griffin and Teece (1982).
Geroski, Ulph and Ulph (1987) treated OPEC as a ‘cartel’. The ten oil producers were divided into four groups; fringe, high & low absorbers, and Saudi Arabia.
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The first equation describes the equilibrium short-run demand which in turn depends on Pjt or the prices of OPEC producers and Ykt or exogenous variables such as income, temperature and seasonal variables.
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The second equation is the objective function maximizing Pt where Pt = (P1t ..Pnt), is the vector of prices during different time periods. The equation reflects the varying conduct of the producer ‘i’, where ‘ẟ’ is the weight the ‘i’ producer puts on long-run profit and ‘(1-ẟ)’ is the weight it puts on other short-run-profits, ‘𝜃’ the value of which reflects the degree of co-operation. It is the weight producer ‘i’ attaches to the long-run profits of other producer. If 𝜃=0 it indicates a non-co-operative equilibrium that solely depends on producer i's excess capacity. The need for short-term profits would lower the value of ‘ẟ’, raising the non-co-operative behavior.
On the other hand, Griffin (1982) called Saudi Arabia “the swing producer”, the determinant of balance that absorbs demand/supply shocks in positive or negative directions to maintain the monopoly price and markup. The monopoly price determination and the overall stability of OPEC would depend more on the extent to which Saudi Arabia’s share in the equation is able to satisfy its objective and less on the cartel’s harmony as a whole.
Reflections from the Past
Perhaps, the grandest legacy of the crisis was a newfound appreciation for energy conservation and exploration. The turmoil paved the way for energy efficiency; an amalgamation of private innovation, public policy measures and individual cooperation aided in at least beginning the odyssey towards a less energy-intensive economy. Yet, there is an overwhelming air of dissonance. What we need isn’t just an awakening, but a full fledged reckoning. As power-struggles continue between OPEC and the international world, and prices set ablaze to reach an altogether different tangent, historical precedent is significant to understanding the dangerous dependence on a somewhat destructive and scarce resource and for meticulously chart our way forward towards the unified goal of sustainability. A paradigm shift in the way the global economy operates by transitioning to a world run on renewable resources is absolutely the need of the hour.
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Anirudh Arun
Senior Editor, Editorial Board
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