Impact of Global Oil Prices on Indian Economy

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Prices of Crude Oil, Coal and Natural Gas i.e. Commodities of Energy are likely to increase in near future, as stated in the report published by The World Bank. The factors affecting the oil prices may be analysed as follows:

Cut in the Supply by the Oil Producing Countries:

  • A combined effort of production cut was decided by the OPEC (Organization of Petroleum Exporting Countries – 14 Countries) and Russia (the largest exporter after OPEC) have already taken the decision to keep the production of petroleum below the level by 2.1 million barrels per day (mbpd) This supply cut has been maintained by these OPEC and Russia and are categorically opposed to increasing the production.
  • Socio-economic situation in Venezuela has been weakening day by day and this has resulted in the decrease in production level of crude oil by 2 mbpd in August, 2017 and 1.5 mbdp in March 2018. Venezuela has been a major exporter of crude oil to various countries.
  • Similarly Mexico has also reduced its production level of Crude oil from 2.4 mbpd to 2.1 mbpd in the month of March, 2018.

Sanctions on Iran to Stay as decided by US Administration:

Certain waiver of sanctions were allowed by the previous US Administration, whereas the same shall not be continued by Trump Administration, which will result in cut in crude production by Iran also.

Threatening by Libyan Militants:

Libyan militants have also threatened to disrupt the supply process which may push up the prices of crude oil.

Under the above mentioned circumstances, it is envisaged that the crude oil prices will remain above $65 per barrel (average) in 2018. As noticed the oil was quoted at $73.59 per barrel on 25th April, 2018 in the international market.

In India where 80% of the import bill goes for payment of Oil imports, this increasing trend of oil prices is not a good news for India. It is also expected that the demand for oil will also increase by 20% in 2018 which will result in further pressure on import bill due to crude oil.

From November, 2014 till January, 2016 there was a free fall in the crude oil prices in the international market that the Union Government besides reducing the Petrol and Diesel prices and to maintain the balance the Government levied duty. When it was observed that the prices were going out of bounds, duty of Rs.2/- was reduced in August, 2017 and further reduced by Rs.2/- in Budget, 2018. Inspite of these efforts the impact of high prices Petrol and Diesel is worsening our macro-economic parameters e.g. increase in subsidy bill, inflationary pressure and deficit in current account balance.

To check these factors, the Government may be constrained to:

  • Reduce interest rates.
  • Increase the subsidy on Petrol and Diesel
  • Check inflationary pressure via other monetary methods and fiscal deficit.
  • Rigorous research and development in alternative use of energy.

In 2017 the average price of crude oil was $53 per barrel (average) and in 2018 it will be likely to remain above $65 per barrel (average)

Government needs to take immediate steps to curb inflation and check CAD (Current Account Deficit) in order to minimise the effects of Global Crude oil prices.

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