About Oil Pricing
There are three crucial benchmarks in the global market, representing the cost of oil produced in the respective geographies.
- Brent: Light sweet oil representative of the European market
- Dubai/Oman: the Middle East and Asian Markets
- West Texas Intermediate(WTI): US market
Reasons for price drop
The global market is now set to witness the rare combination of a low-demand and a high-supply scenario.
High-supply: Price War
- Supply is inversely proportional to low demand.
- High supply means a crash is the price of oil, and a high price is mainly because of the price war.
- The price battle between Saudi Arabia and Russia has flooded the global market with excess oil production, leading to a supply shock.
- According to some reports, the price war could drive the oil price to as low as $20 a barrel
Low Demand reason: Coronavirus impact
- China’s effort to stop the spread of the coronavirus outbreak has disrupted its economy and oil imports.
- The spread of coronavirus all over the world has impacted the Global Market and thus the demand for Crude Oil.
- According to some research, global oil demand growth in 2020 will be less than 0.48 million barrels per day, which is less than from 1.1 million barrels in December 2019,
- The reason for the reduction in oil demand is the shut-down of factories all over the world, disruptions in supply chains and travel restrictions imposed across the globe depress demand.
- Lock-down in countries like Italy create panic in the market
The implication of price drop on the global economy
- It may lead to the complete disintegration of the grouping called OPEC+ because the price war ended the three years of cooperation on supporting the market.
- The race to the bottom could result in many problems related to global oil producers, including the US shale oil industry.
Implication on Indian Economy
The impact of oil price reduction is both positive and negative
India Imports nearly 80% of its oil requirement. The decrease in price gives a positive push to the macroeconomic indicators
- Current account deficit: The decline in oil price will cut the import bill, and soften its current account deficit.
- Inflation: The reduction in crude prices will also help in easing inflationary pressures. It will increase the space for the monetary policy committee to handle rates further
- Fiscal Deficit: The low oil price offers an opportunity to raise some revenue and reduce the fiscal deficit
The slowdown in the Indian economy growth rate has widened the fiscal deficit gap in the last two years.
The revenue earned from the oil price can be used by the government to meet its financial commitment as per the Financial Responsibility and Budget Management Act, 2003
- Reviving Economic Growth: With less pressure from the oil side, the government can invest such money in the other sectors such as telecom to restore it or Putting cash in the hands of households and small businesses may tackle the slowdown in consumption in the Indian economy
Along with the benefits of the reduction in the oil price, there are some negative fallouts
- The value of Indian oil and gas companies will be impacted(Reliance-Aramco deal may get delayed)
- Remittance from the Persian Gulf region will reduce
- Centre’s program to disinvest the Bharat Petroleum corporation limited (BPCL) could delay
- India does not have enough storage reserve for crude oil to take advantage of the present low prices and to save for future deflections in the oil price
- The government should spend excessive gains in reviving the economy. However, this oil price crash will eventually rise in the future. Therefore India needs to reduce dependence on the oil over the long run.
- It should increase the use of renewable resource and promote the use of electric vehicles.
- India should make strategic oil reserves in case of storing oil when the price is low and use it to prevent fluctuation in the oil market
Things to Know for Prelims
- The organization of petroleum exporting countries is a permanent organization of 13 oil-exporting developing countries that coordinates and have a common point on the petroleum policies of its member countries.
- It was founded on 14th September 1960 in Baghdad by the five members (Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela)
- OPEC headquarter is in Vienna, Austria.
- Member countries are Iran, Iraq, Kuwait, Saudi Arabia, Venezuela, Libya, The UAE, Algeria, Nigeria, Angola, Equatorial Guinea, and Congo
- It accounts for an estimated 44% of the global oil production and 81.5% of the world’s proven oil reserves.
- Ecuador suspended its membership effective from 1st January 2020.
- The organization of the Petroleum Exporting Countries plus(OPEC+) are non-OPEC countries which export crude oil are termed as OPEC plus countries
- OPEC plus countries include Azerbaijan, Bahrain, Brunei, Kazakhstan, Malaysia, Mexico, Oman, Russia, South Sudan, and Sudan
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