Millennium Post

Will falling crude prices oil economy?

In three months since August, petrol prices have been slashed six times, a cumulative reduction of Rs 9.32 (Figure is for New Delhi), giving countrymen a sigh of relief. No, it’s not that our new government has been more generous, but it is the effect of international crude prices slipping 29 per cent since June this year. The price of West Texas Intermediate crude, the US benchmark, is wavering around $85 a barrel.

Any country’s economy revolves around its available energy security. For India, still a developing country, it is all the more important for we depend on others for 80 per cent of our energy requirements.

Hence, spiralling down of oil prices has far-reaching economic consequences, though only positive ones for a country which depends heavily on imports.

But first let’s have a brief look at what lies behind this ‘crashing phenomenon’.

Why prices are tumbling?
As the slow-growth concept engulfs China and particularly Eurozone, the oil consumption of these countries has considerably gone down. Other than that, there are numerous factors at work. The supply glut created by world’s largest consumer of oil, America, due to rising output of shale oil has cut down exports from OPEC countries by almost half.US domestic production has reached 8.7 million barrels a day, about a million barrels a day more than just a year ago and the highest level in nearly a quarter century.

 Most of OPEC members are now engaged in price war as they jump to increase their market share. Saudi Arabia, Kuwait, Iraq, Iran and the United Arab Emirates have cut prices to European and Asian buyers as competition for global market share has grown fierce.  However, members are also split on whether to reduce supply in order to drive up prices as dampened prices can influence their profitabilty in the long run. But this this around, OPEC members are ready to play hardball. Market experts still feel that oil prices are not seen as going up anytime soon.

PWC Director & Leader (oil & gas industry) Deepak Mahurkar says, ‘Because of possible threat of US shale oil to OPEC countries, we expect the prices to remain low in next one to one-and-half year.’
Fitch India Ratings Director (Public Finance) Sunil Kumar Sinha says, ‘Prices are not going up anytime soon. However, OPEC cartel may resort to a strategy of driving down prices to a level of  $70 to $75 where shale oil production becomes infeasible, thus driving out America out of competition. And they can later on drive up the prices when the competition ends. So we have to wait and watch what happens next?’

International media has termed Prime Minister Narendra Modi lucky  as this whole slipping-crude-scenario would help his government not just in managing our energy security well, but would also result in rationalising our import expenditures, thus, controlling our out-of-track economic parameters.

Following are a few elements which would be affected if crude prices continue to fall further or sustain this level.

Oil subsidies
According to Oil Ministry officials, with every one dollar fall in crude oil prices, India’s import bill drops by about Rs 3,700 crore. In the year 2013-14, total oil marketing companies (OMCs) under-recoveries stood at close to Rs 1.4 lakh crore, of which Rs 65,121 crore was made good by state-owned firms ONGC and OIL. A small portion of the burden, Rs 1,900 crore,  was borne by GAIL (India) Ltd. For 2014-15, these national oil firms had projected over Rs 127,000 crore revenue losses in selling diesel, kerosene and cooking gas below market rates. Going by the fall in oil prices, if we estimate it to remain around $85 a barrel, then we expect our fuel subsidies to reduce to around Rs 62, 000 crore.
Fiscal deficit
‘Muted oil prices is an excellent news for India on many fronts. We would be able to save our foreign exchange which improves our trade balance.  Since oil is one of the key components of our fuel requirements, the fall will have a consequential effect on the economy as cost of production goes down of industries and profitability improves. Our fiscal deficit will also improve as oil subsidies go down. Hence, the chain effect will result in economic activities picking up’, says Mahurkar.

Echoing similar views, Sinha says, ‘There will be numerous direct and indirect benefits of falling crude oil prices. Direct benefits would include our current account deficit, oil subsidies and fiscal deficit coming down helping our economy. The ‘imported inflation’ will also ease, thus bringing down our WPI and CPI.’

GDP growth
Improved macroeconomic conditions like lower inflation, controlled fiscal deficit, advanced trade balance would sequentially result in GDP growth picking up. According to Nomura report, every $10 per barrel fall in oil price can boost gross domestic product (GDP) growth by around 0.1 percentage points. So can we expect our growth  rate to meet the target of 5.4 to 5.9 per cent for this financial year (2014-15) against the sub-five per cent growth rate achieved in last fiscal? This model will be put to check as this fiscal figures come.

Any strategy?

Though the demand for oil is less in China, it has increased their frequency of oil purchase in order to increase their inventory taking best advantage of the situation.

So should India too follow China’s footsteps? ‘India doesn’t have foreign exchange reserves even closer to that of China. So we cannot think of competing with China. Unlike India which runs a deficit, they run a trade surplus ($31 billion trade surplus in September). Instead, now is the time when we should focus on removing market distortions in the energy market. We should be working on upgrading our energy security,’ says Sinha.

‘Since crude prices are lower, the valuation of the assets will also be less. We should increase our frequency to acquire assets abroad at this valuation and address our energy demand,’ Sinha added.
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