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Oil, Global Politics and Indian Economy

Feb 28, 2016 09:00 IST

Oil is one of the most important commodities in recent times. Much of the economy depends on oil and this is why prices of oil matter to almost every economy including India.

India is one of the largest importers of oil in the world. It imports nearly 70 percent of its total oil needs which accounts for one third of its total imports. For this reason, the price of oil affects India a lot.

Global crude oil prices fell 17 percent to 46.59 US dollars per barrel in 2015 after sliding 47 percent in 2014. Experts are predicting a fall towards 30 US dollars per barrel in 2016.

Reasons for fall in oil prices

The escalating tensions between the Sunni dominated Saudi Arabia and Shia dominated Iran – the two top oil producing nations in the World - is said to be the primary reason behind falling crude prices.

Slowing demand, especially in Asia where the biggest economy and energy consumer, China, is seeing the slowest economic growth in a generation.

Large overhang that has left storage tanks around the world struggling to cope with the excess oil. Domestic crude production in the USA reached 9.6 million barrels in July 2015. Canada experienced a similar sharp surge in production, as heavy investment in tar sands began to pay off.

Shale gas revolution in the USA, in recent years led to lesser dependence on crude oil imports. This revolution is of importance for the global oil market as the USA consumes around 20 percent of the oil production in the world.

Impact on Global politics

Political realignment: Given the centrality of oil in the global power equation, this is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geopolitical clout.

Relevance of OPEC: Oil is not a scarce resource any more. The geopolitical battle is not over access to resources but about global market share. Saudi Arabia seems to flood global markets to push out higher-cost producers, especially in the US. Further Iran has little interest in cooperating with the Saudis on oil. That means that OPEC looks unlikely to be revived.

• Role of Saudi Arabia: It is no longer the swing producer in the global oil market. It is producing at full tilt even though the oil price has collapsed. In the past, Saudi Arabia’s balancing role meant that both low-cost and high-cost producers would supply the market at an elevated price that guaranteed an income stream for all producers.

Role of the USA: If the country’s domestic shale industry manages to maintain production at lower prices, America will be heading towards self-sufficiency in oil and gas. Its interest in guaranteeing stability in the Middle East might wane accordingly thus increasing geopolitical tensions.

Benefits to India

As a major oil importing nation in the world, India will have the following benefits due to reduced oil prices in the global market.

Current account balance: India, one of the largest importers of crude oil, is saving billions of dollars due to falling prices of crude oil. Fall in prices would drive down the value of its imports. This helps in narrowing India's current account deficit.

Inflation: Oil price affects the entire economy, especially because of its use in transportation of goods and services. A fall in oil price also leads to fall in prices of all petroleum by products like tyre, paints, etc. It also benefits many industries because of decreased input costs.

Oil subsidy and fiscal deficit: The government fixes the price of fuel at a subsidised rate which is relative to the market price. Hence, fall in oil prices leads to reduced government fund transfers to oil marketing companies on account of subsidies and thereby, low fiscal deficit.

As per the 2015-16 Economic Survey, decline in global crude oil prices majorly helped in restricting the petroleum subsidy bill to 30000 crore rupees in 2015-16 against 57769 crore rupees spent in 2014-15.

Rupee exchange rate: Low oil price means favourable exchange rate for Indian rupee in the Indian rupee because of reduced dependence on reserved currencies like the dollar for oil payments.

• However, the downside is that the dollar strengthens every time the value of oil falls. This negates any benefits accruing to India due to lower oil prices as it is a major service exporter in the world.

As per the Economic Survey 2015-16, India exported 155.6 billion US dollars worth services in 2014 making the country the eighth largest services exporter in the world.

Downsides for India

The fall in global oil prices may be beneficial to India, but it still has its downsides which are as follows -

Petroleum producers: It affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world. Any fall in oil prices negatively impacts exports.

• Moreover, a lot of India's trade partners and buyers of its exports are net oil exporters. A fall in oil price may impact their economy, and hamper demand for Indian products.

Remittances: As per the World Bank’s Migration and Development Brief 2015, India is the World’s largest remittance recipient with 72 billion US dollars. Majority of this money comes from Indians staying in Gulf countries.

• Hence, any fall in oil prices adversely impacts the economic prospects of GCC and thereby, remittances to India which plays an important role to fund the Current Account Deficit (CAD).

Fallout for rest of the world

Drop in revenue: Major decline in oil export revenues forced countries like Russia, Saudi Arabia and Venezuela to cut public spending which will have long term impact on human development.

Fall in investments: When crude oil price was over 100 dollars a barrel it made sense to spend on exploration in out-of-the-way provinces, such as the Arctic, West Africa and deep below the saline rock off the coast of Brazil.

• This trend has been reversed in recent times as prices have tumbled, so has the investment. Projects worth 380 billion US dollars of investment in oil exploration activities have been put on hold.

Political order: The fall in global crude prices has shifted the global political order that once rested on oil’s soaring price. With concern over climate change growing globally couple with the predominance of renewable energy sources the demand for oil is sure to decline in future.

Conclusion

According to the International Energy Agency (IEA), prices might not again reach the 50 to 60 dollars per barrel range until the 2020s. While this trend may mean hardship for some, especially the citizens of export-dependent States like Russia and Venezuela, it could help others like China and India because of reduced import bill.

India should seize the opportunities provided by the low oil price regime and use its good offices to negotiate long term strategic deals with major oil exporting nations before the market enters into the phase of correction.

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Read more Current Affairs on: energy security , oil prices fall , crude oil , Middle East , oil economy , subsidies

DISCLAIMER: JPL and its affiliates shall have no liability for any views, thoughts and comments expressed on this article.

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