Unriddling the Falling Crude

Early last year, I heard experts claiming that the crude oil prices may climb up to USD $ 120. It was the Iraq crisis that made them to think so. Islamic state of Iraq and Syria (ISIS) had taken control of many oil refineries in Iraq and Syria. Illicit sale of oil to the neighboring countries is fetching them around USD $ 3 million per day. It was believed that this price rise would strengthen this militant group. On the other hand, it was a double whammy for the whole world.

But later in July, oil prices start dipping. Thanks to American shale oil revolution. USA is the world’s largest importer of crude oil. Discovery of shale oil has significantly cut is oil demand. This was a blow to Organization of Petroleum Exporting Countries (OPEC), which accounts for around 81% of the global oil reserves. In its recently concluded meet, OPEC decided not to cut its oil production till June 2015. Experts points out two major reasons for this bold decision. First, is the American shale oil industry which can be a potential competitor to crude oil industry. Oil companies have to put in around USD $ 12 to extract out 1 barrel of crude oil whereas around USD $ 60 for the same amount of shale oil. If the global crude oil prices dips below USD $ 60, then it would be a major blow to America’s shale oil players and will lead to significant slowdown in investment. However a report published by bank of America said Saudi Arabia could be pushing for crude prices to fall in an attempt to stop ISIS from making money and expanding its control in the Middle East. Second is the rivalry between Saudi Arabia and Iran for regional hegemony. Saudi Arabia thinks that Iran would not be able to sustain this price war and its economy would collapse. Iran is backed by Russia which is also an important oil player and is currently facing economic sanctions from the European Union.

India is the third largest importer of crude oil in the world. Crude oil accounts for 31% of country’s total imports. We spends more than 6% of our GDP in energy imports. In the last six months, there have been more than 40% reduction in crude oil prices which would help us to extricate around 3.2 lakh cr. Rupees out of our import bills as compared to the previous financial year. It seems that the oil prices will continue on falling in retaliation to OPEC’s decision. This is surely a good news for India as it will help to cap up the burgeoning current account deficit. Oil has a direct impact on Indian economy. Variation in oil prices directly quivers commodity price. Cheap oil also keeps our foreign currency reserves high which in turn helps in the stability of rupee. In the recent months, our stock market is amongst the best performers in the world. Government has also slashed the fuel prices by about 10 rupees, though fall in prices is always accompanied with rise in demand. This unexpected rise in demand is not good for India from environmental perspective especially at a time when major players (America-China) are pledging strict restrictions on emission. Expert steers that now government should not further decrease the fuel prices as it will create imbalance, in case the price rises again.

NDA government led by Prime Minister Narendra Modi inverted UPA’s that policy in which it decided to cutback the import of oil from Iran under pressure from USA. This would bolster relation with our old and trusted ally Russia. On the other hand, extending invitation to US president Barack Obama as chief guest for this republic day is seen as a fine diplomatic balance. Let’s hope the new government walks the path of progress.


More by :  Dhiraj Kumar

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Views: 3371      Comments: 2

Comment Thank you sir for your valuable compliment.
I''ve been following you since long time, and an admirer of your writing.

Dhiraj Kumar
28-Jan-2015 02:20 AM

Comment Well researched piece. An extremely clear-headed presentation.

Keep it up, young man

H N Bali

H N Bali
24-Jan-2015 10:50 AM

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