Imapct of oil prices – Crtical anlaysis

The impact of these developments on India has been largely positive so far. The country imports 80 per cent of its crude oil requirements so the huge oil import bill is set to fall dramatically this year. The current projections by the Petroleum Ministry are that the crude oil import bill will decline from $113 billion in 2014-15 to $88 billion in 2015-16. This is despite the fact that roughly the same amount of crude oil, about 189 million tonnes, will be imported. In comparison, one must point out that in 2012-13, the country had paid a record $144 billion and a marginally lower $142 billion in 2013-14.

The immediate impact of a lower oil import bill is that the enormous fuel subsidies on petroleum products can be brought down. Oil subsidies had ballooned to Rs 60,000 crore in 2014-15 but were halved to about Rs 30,000 crore in the 2015-16 Budget. The dip in fuel prices is also being passed on to consumers by way of lower retail prices of diesel, petrol and cooking gas. This, in turn, translates into lower inflation as there is a cascading effect of petroleum product prices on commodity rates.

A lowered import bill also affects the current account deficit and the fiscal deficit, giving a great deal of comfort to the Finance Ministry. Foreign investment banks, like Nomura, have estimated that a decline of oil prices to $40 could actually boost growth by up to 0.4 per cent in the current fiscal.

At the same time, there is a downside to lower global oil prices. Primarily, it affects oil exploration projects, many of which are not viable at current prices, especially expensive ones in deep water areas. India’s plans of trying to lure foreign oil companies to explore and discover new oil finds are likely to be dashed as at these rock-bottom prices, there are likely to be few takers for either onshore or offshore blocks. Oil exploration is a high-risk business and higher world prices have always been an incentive for companies to expand activities. In the case of India, foreign oil majors have been lukewarm in the past to the bidding rounds and the changed conditions are likely to make them even more hesitant to take such risks. 

Besides, sluggishness in oil producing economies like Russia could affect the country’s exports in the medium and long term. Plus, India has a large diaspora in the Gulf region which sends huge remittances back home. A slowdown in these economies could lead to a decline in opportunities in these countries and thus affect inward remittances. It may ultimately be more beneficial if crude oil prices stabilise at slightly higher levels than the current $55 per barrel.

Even in this upbeat scenario, however, it is important to push policies to promote oil conservation and fuel efficiency in a sustained manner. It must be recognised that hydrocarbons are not an inexhaustible resource on the planet. As existing oil reserves are drawn down, prospects of easy oil supplies are going to diminish in the long term. It is imperative to prepare for a future where oil is scarce and expensive even though it may seem plentiful and cheap right now. 

By: Deepak Garg