By Tarun Kumar G. Singhal
Raman Jokhakar Chartered Accountants
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From $103 a barrel a year ago, the price of crude oil has crashed to $43, with no bottom in sight. What does this mean for geopolitics and its knock-on effects on India? Oil producing nations, such as Russia, Venezuela, Ecuador, Nigeria, Kuwait and Iraq — and even Saudi Arabia — are feeling the pinch. As oil revenues fall, these nations cut back on social security and government spending, leading to domestic unrest and lower demand for imports.
Two factors are responsible for the collapse of crude. First, production has outstripped demand by a wide margin. The US Energy Information Agency (EIA) reckons that global oil inventories grew by 2.5 million barrels per day during June-July, more than the 0.4 million barrels per day in the same period last year. Demand grew at a sluggish 1.1 million barrels per day, year on year. Iran will hike output from 2016, adding to supply. A slowdown in China and India could further depress demand and lower prices. Two, Saudi Arabia, with the lowest well-head cost of oil production in the world, is locked in a battle for energy supremacy with the US. The latter now needs no energy imports, thanks to shale oil and tar sands from Canada. Riyadh refuses to cut production to boost oil prices because it wants to drive high-cost domestic US oil out of business.
Energy importers like India, Japan and China ought to be happy: lower crude helps balance deficits and could temper inflation. A steady slide in the value of the rupee against the dollar erodes some of the gains from falling oil prices. India can do two things: one, pass on some of the gains from the oil price crash to consumers. Two, sign up long-term contracts with suppliers based on current low prices and the even lower rates projected for the future.
(Source: Editorial in the The Economic Times dated 28-08-2015.)
