Crude Oil price and its Effect on Indian Economy
Yeasterday Crude oil Price from WTI and Mars USA fall to negative which leads to lots of twitter jokes like We can get paid for buying Petrol and Diesel .
Well First of all not all Crude oil price are same. There are different basket from different places (Oil Producers) and every Basket cost differently . For India Crude oil price is still somewhere trading between 20$ to 25$ , which obviously low and a good news for Indian Economy .
But before talking about How low Crude oil price will affect Indian Economy , Let us first talk about Some important aspect like Why does Crude oil price is falling massively ?
Why are Crude Oil Prices falling ?
Well no prize of guessing it. Yes due to Corona virus lock down half of world is under strict lock down, consumption of gasoline (petrol) and diesel has fallen sharply with fewer vehicles on the roads, fewer tractors on farmlands , fewer diesel locomotives chugging along and diesel gen sets operating in different Industries .Taking the example of India the oil Consumption decreases 35% in March due to Corona virus Lock down .
The basics of pricing in economics dictate that prices reach equilibrium where demand equals supply. Today, the demand isn’t enough to absorb the supply and when demand will fall below the supply price will go down very simple .
But this is not the only reason in falling of oil price, The Crude oil price war between OPEC and Russia the two largest oil Producer of world and breakup in dialogue over production cut between them is another main reason . Since when Production starts to go over demand we just cut the production but both OPEC (lead by Saudi Arabia) and Russia refuges to do so . While in last few days they have reached on certain agreement but its too late now and Crude oil Price will be going to remain on this level for many days.
So will it be for short term or long term ?
Well the impact or fall in Crude Oil Prices will be going to depend upon the length of the lock down due to Corona virus . Already, storage capacities for crude oil across the world are near full-up. If the lock downs worldwide continue much longer, there is a strong possibility that more output cutbacks will happen, and that could mean the less efficient oil producers would shut off their oil taps first. And for a large section of them, restarting would be an expensive affair unless crude prices reach the Pre-COVID19 levels. So, when demand finally revives post lock down, the supply will also have got tightened and this could actually lead to a strong reversal in crude prices. But how much the price will reverse it the time will tell .
Now before talking about impact of lower Crude oil price on Indian Economy let us take short account on its impact on global economy
So how lower Crude oil price will effect global economy and different countries of the world ?
Crude oil Price always play its role in someway or the other in global economy .Economy of major oil producer like Arab countries, Russia always majorly depend upon Crude oil Prices ,which is going to get major hit due to fall in prices . Similarly Economy of Oil consumer like China , India etc will get Benefited from it .USA economy will also take a hard hit due to falling in Crude oil prices and it is very crucial since major oil producer states like Texas is Trump leaning and there is going to be Presidential election in USA in 2020 . So Falling Crude oil is going to affect USA general election 2020 .
Now finally coming to how low crude oil price will affect Indian Economy .
How falling crude oil Price will going to affect Indian Economy ?
India is world third largest oil importer (import 80% of its total consumption) and as well as Consumer behind USA and China . China is largest importer and 2nd largest Consumer while USA is largest Consumer and 2nd largest Importer .
So as a Consumer India largely get benefited from lower oil prices . For Every 10 $ a barrel decline improves Indian GDP by 50 basis point or 15 billion $.
Lower Crude oil Prices also leads to lower inflation and help government to keep current account deficit in check.Since both Central Government and State Government levies taxes on Oil Which is one of the largest source of Government Revenue. So when Crude oil Price fall Government increases more tax and which keep the price in market and for general public same but increase revenue for India Government (both State and Central) .
India is expected to turn into a Current Account Surplus country after a gap of 17 year. our currency is not depreciating as is the case with other Emerging market countries. Most Emerging Market currencies have weakened by 20-25% while INR has depreciated only 7% post Corona virus but low Crude oil Price keeping our Currency in check .
Lower Crude oil prices also leads to -
Lower transportation cost for goods and Services.
Lower Railways travel cost which is hugely subsidized (about 47% ).
Lower cost of air travel which is again a very good news because due to corona virus Lock down Airline companies are going to badly hit but lower crude oil price can help them in quick recovery .
