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In NEWS

  1. As India depends on imported crude oil, global trends have a big impact.
  2. Crude Oil prices fell sharply yesterday on disappointing economic data & as signs of a slowdown in China and Europe reinforced worries about weakening demand for petroleum.
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Why are crude oil prices falling now?

  1. Prices have swayed from above $160 per barrel in June 2008 to about $35 in January 2016.
  2. The recent fall has been attributed to two main factors:
  3. Higher supply and volatility due to uncertainty about the global economy.
  4. Fears of the consequences of a full-fledged trade war between the S. and China have rattled speculators.

  • Key support factors for oil price would be anticipated production cuts as well as U.S. sanctions against Iran.
  • Also, automobile demand has risen globally, and as internal combustion engines still rule the roost, demand for oil is not expected to plummet yet.
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What’s the Indian basket of crude?

  1. It is the weighted average of Dubai and Oman (sour) and Brent (sweet) crude.
  2. It’s the indicator of the price of crude imports for India and the index has a bearing on price rise in the country.
  3. The price of the Indian basket averaged at almost $70 for April 2018 and had risen to breach $80 in October 2018.
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How do fuel prices influence inflation?

Historically, oil price swings and inflation have been positively correlated, even though this relationship has varied widely across countries.

  1. Prices of goods are determined as much by their supply as by the cost of transportation.
  2. Rise in fuel costs are passed on by truck fleet owners down the chain to consumers.
  3. Accelerating inflation influences the central bank to raise rates thereby making it costlier to borrow.
  4. Higher interest rates keep supply of money in check and hence control inflation.
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What factors influence crude oil price?

  1. Global demand for oil.
  2. Decisions by major producing nations to raise/ cut supplies and
  3. The global political environment are the key reasons to oil prices.
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Key Channels

  1. Falling oil prices often affect activity and inflation by shifting aggregate demand and supply and triggering policy responses.
  2. On the supply side, lower oil prices lead to a decline in the cost of production.
  3. The lower cost of production across a whole range of energy-intensive goods may be passed on to consumers and hence, indirectly, reduces inflation.
  4. The lower cost of production can also translate in higher investment. On the demand side, by reducing energy bills, a decline in oil prices raises consumers’ real income and leads to an increase in consumption.
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How does crude oil price affect the rupee?

  1. India imports more than 80% of its crude oil requirements, and it has to pay for these imports in foreign currency, mainly dollars.
  2. If international crude prices rise, refiners in the country need to spend more in dollars.
  3. If there is volatility and uncertainty about which way prices will sway, refiners tend to buy more oil and stock up.
  4. As rupees are exchanged for the U.S. currency in this exercise, it generates a demand for the dollar, thereby weakening the rupee.
  5. On October 1st, 2018, the Indian basket price was $82, and the rupee rate was 72.8 to a dollar. By November 20th, 2018, the Indian basket had eased to $64.8 and the rupee, almost in tandem, strengthened to 71.3.
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Conclusion

  1. The recent decline in oil prices will have significant macroeconomic implications.
  2. If sustained, it will support global growth and disinflation.
  3. It will also trigger significant real income shifts from oil exporters to oil importers, strengthening growth and reducing inflation in many oil- importing countries but dampening economic activity in oil-exporting countries.