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Sharp Slide In Global Oil Prices

Context:

Brent crude prices have fallen sharply over the last ten days, the prices have declined to under USD 90 per barrel.

  • While they were trading at around $110 per barrel in July,2022.

Relevance:

GS III: Indian Economy (Growth and Development)

Dimensions of the article:

  1. What led to the sharp slide in Global Crude Oil Prices?
  2. What does this mean for India?

What led to the sharp slide in Global Crude Oil Prices?

  • The crude prices fell sharply by around 4% and the decline has come despite OPEC’s announcement to cut supply by 100,000 barrels per day beginning October in a bid to prop up the prices.
  • While the prices have been softening over the last couple of months, the recent sharp decline is due to renewed fears of recession in Europe and decline in demand from China, which brought in new Covid lockdown measures amid weakening factory activity.
    • There is a concern that these factors could dent the future demand of crude oil.
  • Market participants say OPEC’s decision to cut production is in itself an indication that it expects decline in demand and further softening in prices.

What does this mean for India?

Impact of Rise in Global Oil Price:
  • India imports nearly 85% of its crude requirement and in the year ended March 2022, the oil import bill doubled to $119 billion on account of rise in prices.
    • The rise in import bill not only leads to inflation and rise in current account deficit and fiscal deficit, but also weakens the rupee against the dollar and hurts stock market sentiment.
  • A rise in crude oil price also has an indirect impact on India as it leads to a rise in edible oil prices, coal prices and also that of fertiliser as they use gas as the feedstock. Gas accounts for 80% of all fertiliser production costs.
  • So if a rise in crude oil prices could lead to a much enhanced import burden, it also leads to reduction in demand in the economy which hurts growth. It could also lead to higher fiscal deficit if the government chooses to bear the burden by way of subsidies.
Impact of Fall in Global Price:
  • In that sense, a softening in crude oil prices is a big relief for all stakeholders – the government, the consumers and even the corporates.
  • If oil continues to trade at lower levels, it will result in lower inflation levels, higher disposable incomes and thereby higher economic growth.

-Source: Indian Express


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