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Slide in Global Oil Prices

  • 09 Sep 2022
  • 5 min read

For Prelims: Organisation of the Petroleum Exporting Countries (OPEC+) plus, RBI, Inflation, Fiscal Deficit.

For Mains: Slide in Oil Prices and its impact on India.

Why in News?

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.

What led to the Fall in Global Crude Oil Prices?

  • The crude prices fell sharply by around 4% and the decline has come despite Organisation of the Petroleum Exporting Countries (OPEC+) plus announcement to cut supply by 100,000 barrels per day beginning October, 2022 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 a decline in demand and further softening in prices.

How would Global Crude Oil Price Impact 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 USD 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 fertilizers as they use gas as feedstock. Gas accounts for 80% of all fertilizer 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:
    • 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.
    • If on the one hand it is a reflection of expectations of slowdown in global growth which may have its bearing on India’s growth too, on the other it comes as a big respite for India.
    • Softening crude oil price has also played a role in the index rise on equity and debt markets as companies across sectors are sensitive to crude oil prices.

UPSC Civil Services Examination Previous Year Question (PYQ)

Prelims

Q. The term ‘West Texas Intermediate’, sometimes found in news, refers to a grade of (2020)

(a) Crude oil
(b) Bullion
(c) Rare earth elements
(d) Uranium

Ans: (a)

  • West Texas intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing.
  • WTI is described as light crude oil because of its relatively low density, and sweet because of its low sulfur content.
  • It is sourced from US oil fields, primarily in Texas, Louisiana, and North Dakota.
  • Therefore, option (a) is the correct.

Mains

Q. Petroleum refineries are not necessarily located nearer to crude oil producing areas, particularly in many of the developing countries. Explain its implications. (2017)

Source: IE

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