RSTV | India’s World | Causes and Impact of Fall in Oil Prices

Today onwards, we will try to discuss one RSTV or DD NEWS video everyday. We shall not restrict ourselves to issues discussed in video but take a more holistic look at all the issues involved in a very simple yet comprehensive manner. Doubts if any can be asked in the comment box below.

Please note that this is on best effort basis. An alarming lack of participation will see me packing my bags and going of to himalayas for nirvana or a frostbite (whichever comes first!)


 

Today we discuss causes and impact of falling oil prices.

Context : Crude oil price has been in free fall and Brent crude price has declined from 110$ a barrel in mid 2014 to 30$ a barrel.

Q. What are the reasons behind this sudden decline?

1. Glut in the market (increased supply)-

US shale oil, Rising production in post war Iraq

2.  Slowdown in demand for oil

Global slowdown, Chinese slowdown, climate change concerns

3. Tactic by S. Arabia to price out US shale producers

4. Geopolitical conspiracy theory– to punish Russia and Iran, both being heavily dependent on oil revenues

Q. Earlier OPEC used to cut supplies to stabilize the prices, why has it not done so this time?

1. S. Arabia is the swing producer. It can produce oil at 10$ a barrel. It declined to cut production to maintain market share.

2. After shale bonanza, US seemed to be withdrawing from middle east oil market, thus effectively from middle east geopolitics,  backing Saudis got from US will no longer be forthcoming in such a scenario. Saudi seems to want to suck US back into the equation.

Q. Will prices remain at such low level?

1. At very broad macro level, such prices reflect very weak global economy. Global demand is very muted. In fact almost all commodities are down. Global demand is unlikely to pick anytime soon. Prices are likely to hover around at 20 to 40$ a barrel.

2. After sanctions relief, Iranian crude will enter the market, Iraq is increasing its supply leading to further glut in the market and putting downward pressure on prices.

Q. What will be the impact of falling crude prices on Major oil producing nations?

They are in for a very tough time.

1. Russia is already into recession due to sanctions and falling prices.

2. S. Arabia is likely to run 20% budget deficit, yes 20%. IMF has warned that, at this rate, huge war chest of 1t$ of forex reserves will exhaust within 5 years.

3. Dubai has already started raising user charges.

Effect of all this would be breakdown of compact b/w state and citizen where citizens have sort of parted with their democratic rights in lieu of cheap services which would no longer be forthcoming.

Q. What will be its impact on emerging economies?

1. Most of them are oil importers. To the extent low prices bring down input costs, it will benefit them.

2. But low oil prices also reflect weakening of global demand and that harms emerging market exports.

3. World financial system is very petrodollar dependent. Pull out of sovereign wealth funds from markets would bring down stock market, that may have negative effect on demand through wealth effect.

Q. What would be its impact on India? How should India best utilize this opportunity?

1. Massive forex savings- 10$ decline in crude price improve our net trade or current account balance by 9.4b$.

2. Decreases our subsidy bill, this fiscal deficit.

3. Brings down input cost, increasing competitiveness and reducing inflation.

4. Govt. mop up revenue by increasing indirect taxes on petrol and diesel.

To take full benefit of falling oil prices, govt. need to use the money to boost public investment in infrastructure. It would generate demand in the short term while improving productivity growth in the long term.

Today onward, we shall discuss one RSTV or DDNEWS video everyday. We shall not restrict ourselves to issues discussed in video but take a more holistic look at all the issues involved in a very simple yet comprehensive manner. Doubts if any can be asked in the comment box below.

Today we discuss causes and impact of falling oil prices.

Context : Crude oil prices have been in free fall and Brent crude prices have declined from 110$ a barrel in mid 2014 to 30$ a barrel.

Q. What are the reasons behind this sudden decline?

1. Glut in the market (increased supply)-

US shale oil, Rising production in post war Iraq

2.  Slowdown in demand for oil

Global slowdown, Chinese slowdown, climate change concerns

3. Tactic by S. Arabia to price out US shale producers

4. Geopolitical conspiracy theory– to punish Russia and Iran, both being heavily dependent on oil revenues

Q. Earlier OPEC used to cut supplies to stabilize the prices, why has it not done so this time?

1. S. Arabia is the swing producer. It can produce oil at 10$ a barrel. It declined to cut production to maintain market share.

2. After shale bonanza, US seemed to be withdrawing from middle east oil market, thus effectively from middle east geopolitics,  backing Saudis got from US will no longer be forthcoming in such a scenario. Saudi seems to want to suck US back into the equation.

Q. Will prices remain at such low level?

1. At very broad macro level, such prices reflect very weak global economy. Global demand is very muted. In fact almost all commodities are down. Global demand is unlikely to pick anytime soon. Prices are likely to hover around at 20 to 40$ a barrel.

2. After sanctions relief, Iranian crude will enter the market, Iraq is increasing its supply leading to further glut in the market and putting downward pressure on prices.

Q. What will be the impact of falling crude prices on Major oil producing nations?

They are in for a very tough time.

1. Russia is already into recession due to sanctions and falling prices.

2. S. Arabia is likely to run 20% budget deficit, yes 20%. IMF has warned that, at this rate, huge war chest of 1t$ of forex reserves will exhaust within 5 years.

3. Dubai has already started raising user charges.

Effect of all this would be breakdown of compact b/w state and citizen where citizens have sort of parted with their democratic rights in lieu of cheap services which would no longer be forthcoming.

Q. What will be its impact on emerging economies?

1. Most of them are oil importers. To the extent low prices bring down input costs, it will benefit them.

2. But low oil prices also reflect weakening of global demand and that harms emerging market exports.

3. World financial system is very petrodollar dependent. Pull out of sovereign wealth funds from markets would bring down stock market, that may have negative effect on demand through wealth effect.

Q. What would be its impact on India? How should India best utilize this opportunity?

1. Massive forex savings- 10$ decline in crude price improve our net trade or current account balance by 9.4b$.

2. Decreases our subsidy bill, this fiscal deficit.

3. Brings down input cost, increasing competitiveness and reducing inflation.

4. Govt. mop up revenue by increasing indirect taxes on petrol and diesel.

To take full benefit of falling oil prices, govt. need to use the money to boost public investment in infrastructure. It would generate demand in the short term while improving productivity growth in the long term.

 

By Dr V

Doctor by Training | AIIMSONIAN | Factually correct, Politically not so much | Opinionated? Yes!