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IAS Prelims : GS Economy : Falling Global Crude Oil Prices

Feb 23, 2015 18:45 IST

    From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June 2014 prices have more than halved. Continuous fall in world oil prices have various ramifications for global economy in general and India in particular. Here we will list out the reasons and impacts of falling crude oil prices on India and the world.

    Reasons for Falling Global Crude Oil Prices

    The main reasons behind the fall in global oil prices are:

    •    Weak demand in many countries such as Eurozone, Japan and China due to low economic growth, increased efficiency, and a growing switch away from oil to other fuels.

    •    The shale and fracking induced boom in the U.S. has pushed crude oil production to a 27-year high. U.S. dependence on petroleum imports has decreased by half since 2005. This has added to the market surplus.

    •    Organisation of Petroleum Exporting Countries (OPEC), which accounts for about 40 per cent of global oil output, is determined not to cut production as a way to prop up prices. Oil output is rising on account of the US shale boom. OPEC members are apprehensive that US will take over their market share. So keep US out of competition, they are deliberately keeping the oil prices low by not cutting the production.

    •    Turmoil in Iraq and Libya, two big oil producers, has not affected their output.

    Global Impact of Falling Crude Oil prices

    •    Low oil prices are a problem for oil producers like Russia and Venezuela which are in turmoil and their economies are in deep trouble.

    •    Large oil consumers such as US, China, Japan and India are being benefitted in the form of large savings from falling oil prices.

    •    Saudi Arabia and the middle-east producers will probably see sizeable deficit in revenues from oil, which could drain their forex reserves substantially. This will result in economic slowdown in these countries.

    •    Geopolitical importance of Middle East countries would reduce if the fall in oil prices continues. There can be domestic political instability in these countries.

    For India, falling oil prices will have both positive and negative impacts.

    Positive Impact on India

    •    Lower oil prices reduce pressure on the consumer who can spend the savings elsewhere, spurring the demand side of the economy.

    •    India, which is the fourth largest consumer of oil, is a big beneficiary of falling oil prices. The reduced prices will not only lower the import bill but also help save foreign exchange.

    •    It will reduce current account deficit (CAD) and if handled well it can be translated into economic growth.

    •    The subsidy burden for the government of India will decline significantly because of fall in crude oil prices, which will help contain fiscal deficit.

    •     Falling oil prices also helped the government decontrol diesel prices.

    •    Falling oil prices will cut down production cost of other essential items and thus will bring down overall inflation in the economy. This in turn would result in lower interest rates and greater investments.

    Negative Impact on India

    •    India's exports to oil producing economies could get impacted when the growth rates of those economies take a dip due to low oil prices.

    •    Apart from being the fourth largest oil importer, India is also the world’s sixth largest petroleum product exporter. Fall in oil prices would hurt this segment of economy.

    •    There is a huge non-resident Indian presence in the Gulf. Their incomes could be affected if these oil-producing countries are hit. This will depress remittances from them to India.

    •    Lower oil prices may cause higher fuel consumption which in turn would worsen commuter woes as well as cause increased urban pollution.

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