Even as the world grapples with COVID-19 pandemic, the energy war has started to precipitate the global oil prices to lower levels.
Why the prices are falling?
Because the Organization of the Petroleum Exporting Countries (OPEC) and its alliance partners failed to reach any consensus on cutting back production that would enable prices to remain stable. There has been a spectacular fall of around 30% in crude oil prices.
- Demand for oil had already weakened owing to the global economic slowdown
- The weakening has become more pronounced due to the COVID-19 pandemic, which has hit China’s economy and reduced consumption by the world’s largest importer.
Selfish or Enemity?
- The U.S., as the largest oil producer today, has stayed away from the OPEC-plus arrangement, hoping that production cuts by OPEC-plus countries will help it increase its market share.
- Russia refused any production cuts, unleashing an energy war with Saudi Arabia. Russia’s decision driven by its strategy of denying market share to American shale oil producers. This has forced the US administration to come up with a rescue plan for its Shale producers
- Russia also remains resentful of sanctions imposed on Rosneft, which is building the gas pipeline project Nord Stream 2 across the Baltic Sea, carrying Siberian gas to Germany, a major consumer.
- This pipeline was delayed due to opposition from Denmark’s environmental activists and could not be completed before the U.S. sanctions kicked in. Moscow has accused Washington of using geopolitical tools for commercial reasons.
Oil Revenue dependency
Both Saudi Arabia and Russia depend heavily on oil revenues — upwards of 80% of export revenues accrue from crude oil. Both are also fighting to retain market share.
Benefit to importing countries
Saudi Arabia has agreed to supply crude oil at lower rates to refiners in India and China, but not to other refiners in Asia. This will impact on India’s oil procurement from the U.S..
- Lower crude oil prices mean lower import bill for India, which is the world’s third-largest importer of crude oil and the fourth largest importer of LNG.
- However, collateral adverse consequences like the battering of the stock markets worldwide.
- From a high of $147 per barrel in 2008, crude oil prices have fallen to around $24 per barrel, and India with 80% of its energy requirements met by imports from the international market, stands to save Rs. 10,700 crores for every $1 drop in prices.
While this may help manage the current account deficit, fiscal deficit and inflation, there are non-oil related collateral factors that can cause countervailing adverse economic impact.
How to use the gains?
There is no doubt that India will benefit from lower oil prices, if the cost of fuel at the pump is passed on to consumers. It will reduce transportation costs and boost demand. The consumer, however, may not benefit much since the government may choose to use this financial windfall for other purposes, like bailing out banks which have been hollowed out by NPAs to leading Indian companies.