Turmoil in oil market and its impact on India
The price of West Texas and Brent crude oil has dived below $34 per barrel! lowest in 11 years, world in shock.
Reasons:
1. China's slow growth rate: Asia's largest consumer of oil, and largest & fastest growing economy, has seen slowest growth of the generation. Its currency 'Yuan' is also depreciating in the global market. Trading on its stock markets has also been suspended (twice in a week), because of the same reason. The world Bank has predicted that China's trouble will also lead to decrease in commodity prices. The demand of oil in China has reduced significantly due to which global market is overwhelmed with the glut of oil.
2. Organization of Petroleum Exporting Countries (OPEC) undivided: The breaking off of diplomatic relation between Iran and Saudi Arabia shows just how it is impossible for those rival countries to cooperate for the oil prices. The Saudi Arabia, largest producer in OPEC, is pumping excess of 10 million barrels-a-day to the global market in attempt to break the rival producer and Iran is gearing up for its big return in global market after years of sanction. Now, Iran is likely to add more to the world's oil glut.
3. Shale Oil production by USA: America mastered itself in the production of shale oil, it made them independent in their domestic oil need. USA which is largest importer of crude oil suddenly reduced their imports by sigmificant factor, led to the increase in supply of oil in the global market. Also its continuous production of shlae oil in 2014 and 2015 has further worsen the situation.
Impact on India - Positive and Negative:
Positives:
India imports roughly 80% crude oil to meet its domestic oil demand (India ranks 3rd in terms of import and 4th in terms of consumption).
The dip in the price of the oil in global market, is directly reflected in the Government of India balance sheet. In 2015-16 India imported 189.432 MMT of crude oil at $ 84.200 (average), as compared to 189.234 MMT at $ 105.520 in 2014-15.
This is good news as this helped India to reduce the budget deficits.
Negatives:
As India is one of the largest importer of crude oil, it is also a largest exporters of finished/refined petroleum product. The drop in the oil prices reduces the profit on the export of the petroleum products.
At the same time there is a slow down in the world economy so the global demand has also dropped resulting in less export of Indian finished/refined petroleum products (and other items too).
From one point of view the drop in crude oil prices resulted in positive impact on government's balance sheet but due to exports, we find ourself in the same situation.
Future:
Production of crude oil from the OPEC countries seems not to fall in the near future. In next few months the crude oil price may further decrease.
But by the end of this decade the crude oil price may increase. Right now the production of crude oil has become uneconomical, and many companies in the West has stopped producing the oil from their oil wells. Slowly and steadily the glut of oil which is in the global market will be consumed and simultaneously the demand will increase. Using basic demand and supply model, the prices of the oil is hope to shoot up.
Reasons:
1. China's slow growth rate: Asia's largest consumer of oil, and largest & fastest growing economy, has seen slowest growth of the generation. Its currency 'Yuan' is also depreciating in the global market. Trading on its stock markets has also been suspended (twice in a week), because of the same reason. The world Bank has predicted that China's trouble will also lead to decrease in commodity prices. The demand of oil in China has reduced significantly due to which global market is overwhelmed with the glut of oil.
2. Organization of Petroleum Exporting Countries (OPEC) undivided: The breaking off of diplomatic relation between Iran and Saudi Arabia shows just how it is impossible for those rival countries to cooperate for the oil prices. The Saudi Arabia, largest producer in OPEC, is pumping excess of 10 million barrels-a-day to the global market in attempt to break the rival producer and Iran is gearing up for its big return in global market after years of sanction. Now, Iran is likely to add more to the world's oil glut.
3. Shale Oil production by USA: America mastered itself in the production of shale oil, it made them independent in their domestic oil need. USA which is largest importer of crude oil suddenly reduced their imports by sigmificant factor, led to the increase in supply of oil in the global market. Also its continuous production of shlae oil in 2014 and 2015 has further worsen the situation.
Impact on India - Positive and Negative:
Positives:
India imports roughly 80% crude oil to meet its domestic oil demand (India ranks 3rd in terms of import and 4th in terms of consumption).
The dip in the price of the oil in global market, is directly reflected in the Government of India balance sheet. In 2015-16 India imported 189.432 MMT of crude oil at $ 84.200 (average), as compared to 189.234 MMT at $ 105.520 in 2014-15.
This is good news as this helped India to reduce the budget deficits.
Negatives:
As India is one of the largest importer of crude oil, it is also a largest exporters of finished/refined petroleum product. The drop in the oil prices reduces the profit on the export of the petroleum products.
At the same time there is a slow down in the world economy so the global demand has also dropped resulting in less export of Indian finished/refined petroleum products (and other items too).
From one point of view the drop in crude oil prices resulted in positive impact on government's balance sheet but due to exports, we find ourself in the same situation.
Future:
Production of crude oil from the OPEC countries seems not to fall in the near future. In next few months the crude oil price may further decrease.
But by the end of this decade the crude oil price may increase. Right now the production of crude oil has become uneconomical, and many companies in the West has stopped producing the oil from their oil wells. Slowly and steadily the glut of oil which is in the global market will be consumed and simultaneously the demand will increase. Using basic demand and supply model, the prices of the oil is hope to shoot up.
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