Explainer: How do crude oil prices spoil the economic health of the country? - Newztezz Online


Friday, September 8, 2023

Explainer: How do crude oil prices spoil the economic health of the country?

Crude oil prices in the global market have reached a 10-month high. Which is likely to reach more than 100 dollars per barrel in the coming days. India imports 85 percent of its oil requirement. In such a situation, the rising prices of crude oil in the international market has a great impact on India's economy.

Saudi Arabia and Russia have extended their sovereign oil production cut till the end of the year. Due to which there has been a sharp rise in the prices of crude oil. Brent and US West Texas Intermediate i.e. WTI crude has reached a 10-month high. While Saudi Arabia has cut oil supply by 1 million barrels per day (bpd), Russia has limited production to 300,000 bpd. After which the price of Brent crude oil reached $ 91 per barrel, which crossed $ 90 per barrel for the first time after November 16, 2022. US WTI reached close to $87.

Investors were expecting that Saudi Arabia and Russia would extend the production cut till October, but the cut till December was shocking for everyone. At present, OPEC countries produce about 30 percent of the world's crude oil. Saudi Arabia is the largest oil producer in this group, producing more than 10 million barrels per day.

At the same time, OPEC+ pumps about 40 percent of the world's crude oil and its policy decisions can have a big impact on oil prices. High prices of crude oil in the international market can have a big impact on the economy of an economy like India. India imports 85 percent of its crude oil requirement. Let us also tell you how crude oil prices can affect the economy.

increase in import bill

India is among the countries in the world which import the most crude oil. India imports 85 percent of its crude oil requirement. If the prices of crude oil continue to increase in the international market throughout the year, then the country's import bill may see an increase. According to the Petroleum Planning and Analysis Cell (PPAC), India has produced a total of 2.50 million metric tons (MMT) of crude oil in July 2023, which is 2.1 percent more than a year ago.

Crude oil imports during June 2023 and April-July 2023 decreased by 6.3 percent and 2.4 percent respectively as compared to the same period last year. According to PPAC, the import bill for oil and gas in July 2023 was $ 9.8 billion, while in July 2022 it was $ 15.8 billion.

Increase in petrol and diesel prices

Due to rising prices of crude oil at the international level, oil companies like Indian Oil, Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) may increase the prices of petrol and diesel. Crude oil prices peaked at $140 per barrel in March 2022, after which oil companies did not increase retail prices that much last year. Due to which oil refiners suffered huge losses. The reason for this is that oil companies have not made any change in the prices of petrol and diesel from April 2022.

By the way, the central government can force the oil marketing companies to make petrol and diesel cheaper. In fact, due to strong profits in the current financial year, the balance sheets of the companies have recovered to a great extent. Companies are also making a lot of profit per liter of petrol and diesel. According to domestic brokerage firm JM Financial, the government may cut the prices of petrol and diesel around Diwali. He said that assembly elections will be held in five states of the country in November and December, in such a situation the price of petrol and diesel can be reduced to provide relief to the common people.

fall in rupee

Due to the increase in crude oil, there is an increase in the US dollar and there is a decline in the currency of oil importing countries. Due to the rise in crude oil, the Indian rupee fell by 10 paise against the US dollar on Thursday and reached a lifetime low. The Indian rupee has fallen to 83.23 against the US dollar. While the rupee had closed at 83.13 on Wednesday. According to Jatin Trivedi, VP Research Analyst, LKP Securities, the dollar index has come down to the level of 105. Also, the price of crude oil has been more than $85 for a long time. Because of which there has been a decline in the rupee against the dollar.

increase in fiscal deficit

With crude oil reaching high levels, the subsidy burden on the central government will increase. The government bears the difference between the market price and control price of oil and gas end products like kerosene, diesel, liquid petroleum gas (LPG). This increases the possibility of increasing the fiscal deficit. According to official data, the government's fiscal deficit has crossed Rs 6 trillion, which is one-third of the total projected deficit for FY 2024-24. At present, the fiscal deficit is 33.9 percent of the target for the whole year, which is due to the arrival of strong tax and non-tax revenue. The total revenue in the first four months of this financial year is 7.6 trillion or 29 percent of the target for the whole year.

Deterioration of India's trade balance

Due to rising prices of crude oil, India will have to withdraw more money from its foreign exchange reserves or borrow dollars from foreign countries to buy oil. Due to this, the Indian economy may have to face financial difficulties arising from currency fluctuations and the impact of high crude oil prices.

Strong US dollar and rising US bond yields weaken the Indian currency, which impacts trade deals in the commodity basket. Weak currency suffers from such deals. Higher crude oil prices will also affect the country's trade balance and terms of trade with other countries.

inflation pressure

Cut in oil supply can increase the current amount deficit to about 0.4 percent of GDP. Due to the increase in the prices of petrol and diesel, the price of household goods increases. Due to the continuous increase in the prices, there is a possibility of demand. According to the Reserve Bank of India, its effect is seen for a very short time.

decrease in economic momentum

Due to increase in the price of crude oil, production and transportation quotas of many sectors increase. Due to which their profitability will also be affected. This will also reduce the disposable income of the consumer. Due to which the demand for their goods and services will be affected. According to experts, consumer behavior plays an important role. When fuel prices rise, consumers may cut back on discretionary spending, which could impact economic activity. Reduction in spending by consumers can affect those sectors which are completely dependent on demand. India is the fourth largest global energy consumer after China, United States and European Union.

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