The recent sudden drop in Brent crude oil prices, from around $110 per barrel in July 2022 to below $90 per barrel, has sparked discussions on its implications. This situation occurred despite the Organisation of Petroleum Exporting Countries (OPEC+) announcing plans to cut supply in an attempt to sustain prices. The major reasons behind this unexpected plunge are fears of a recession in Europe and a decrease in demand from China due to a resurgence of COVID-19.
Global Crude Oil Prices: The Rise and Fall
The steep decline of around 4% resulted from concerns of a potential European recession, coupled with reduced demand from China, which instituted new lockdown measures in response to a diminished factory activity. These factors could negatively affect future crude oil demand. Market stakeholders reason that OPEC’s move to slash production signals an anticipated decrease in demand and a further softening of prices.
Impact of Global Crude Oil Prices on India
India, reliant on imports for almost 85% of its crude oil needs, saw its oil import bill double to USD 119 billion by March 2022 due to rising prices. Beyond directly increasing the import bill, escalated oil prices can also trigger inflation, elevate the current and fiscal account deficit, weaken the INR against USD, and dampen stock market sentiments.
Indirect Impact of Crude Oil Prices
The rise in crude oil prices indirectly affects India by driving up the costs of edible oil, coal, and fertilizers, which use gas as feedstock. Gas is responsible for 80% of fertilizer production costs. An increase in crude oil prices not only inflates the import burden but also suppresses demand in the economy, thereby stunting growth. Furthermore, it could widen the fiscal deficit if the government opts to absorb the impact through subsidies.
Fall in Crude Oil Prices: A Relief for India
Conversely, a decrease in crude oil prices comes as a relief to the government, consumers, and even corporations. Provided that oil continues to trade at lower levels, it could lead to diminished inflation, increased disposable income, and subsequently, enhanced economic growth.
However, there is a need for caution – while the falling oil prices offer great respite for India, they also mirror an expectation of a slowdown in global growth which may impact India’s growth trajectory. Nevertheless, the lowering of crude oil prices has also contributed to the rise in equity and debt markets, as companies from various sectors are sensitive to fluctuations in crude oil prices.
Understanding Crude Oil Through UPSC Civil Services Examination Questions
To understand the nuances of crude oil and its implications, we can refer to previous years’ questions asked in the UPSC Civil Services Examination. For instance, the term ‘West Texas Intermediate’ (WTI), often seen in news, refers to a specific grade of crude oil used as a benchmark for oil pricing. Known for its low density and low sulfur content, WTI is primarily sourced from US oil fields located in Texas, Louisiana, and North Dakota.
The dynamics of the global crude oil market have far-reaching implications for economies worldwide, particularly for countries like India that rely heavily on crude oil imports. Thus, keeping an eye on these trends becomes imperative to foresee and mitigate potential impacts on the domestic economy.
