Fuelling growth
Oil prices falling despite OPEC reducing production is good news for importers like India
The Indian government can breathe more easily about one of its macro-economic concerns: Rising global oil prices. Despite a successful effort to reduce oil production by the Organization of Petroleum Exporting Countries, oil prices recently fell to below $ 50 a barrel, a threemonth low. The primary reason: A countervailing surge in shale oil production by the United States. The US’ ability to quickly ratchet up oil production in response to higher prices has put a ceiling on global crude prices. This is excellent news for India, among the world’s largest importers of oil and gas.
The Narendra Modi government has benefited from the slump in oil prices that began in 2014. By some estimates the drop in world oil and gas prices provided a windfall of over $10 billion to New Delhi in the 2015-16 financial year. The central government has had to pay less in fuel subsidies. It has also, by passing on as little as a fifth of the drop in prices to customers, given the Indian exchequer a multi-billion dollar revenue windfall. One of the main reasons the Modi government has largely been able to meet its fiscal deficit targets has been its ability to impose higher taxes on imported oil without affecting prices for users. When OPEC, led by Saudi Arabia, announced plans to reduce crude production there were fears oil would rise to a new plateau in the $70-80 range. This would have taken a substantial bite out of India’s economy, though Indian officials said they were comfortable with a price of up to $65. Oil prices did indeed rise, but so did US shale production. The Indian leadership has long dreamt of being self-sufficient in oil and gas. Given the fuel demands and the seeming inability of any Indian government to produce a market-friendly regime for hydrocarbon prospecting, New Delhi would be better off assuming a future of enormous oil and gas imports. The real sources of energy security would then be in influencing global price hubs, reducing the chances of supply disruption and developing transparent futures markets. Energy security is, ultimately, about being able to create a stable global environment not just digging more holes at home.