What the dip in oil prices means
A possible fiscal dividend will come as a huge relief to India
The world’s number two and three oil producers are going to war with each other over how to tackle the number one oil producer, the United States. The result: Bloodletting in the world’s energy markets but a huge windfall for India, the world’s number two oil consumer. The expectation of an oil price war between Russia and Saudi Arabia has already driven oil prices below $ 35 a barrel. If the two fail to come to an understanding soon, both countries will pump millions of barrels of extra oil and keep black gold in the red zone all through this year. A $20 drop in oil prices reduces India’s balance of payments deficit by $30 billion. Most of these savings will accrue to the government, providing more than 20% top off to its expected receipts this year. There will be some minuses as well: the value of Indian oil and gas companies will be impacted, remittances from the Persian Gulf will reduce, and the price tag for a privatised Bharat Petroleum will dip. But, overall, it will be a major fillip for a government struggling with falling revenues and rising deficits.
Over the past three years Russia (the third largest producer) and Saudi Arabia have held up oil prices by cutting production. However, Moscow was increasingly unhappy with this strategy because it failed to address its real problem: the US shale oil industry. Buoyed by windfall profits and increased market share, the US industry was going from strength to strength. Washington also used this clout to impose sanctions against the Russian energy industry. These geopolitical concerns were not shared by Saudi Arabia (second largest producer). The fall in demand because of the coronavirus was the last straw. Moscow decided to unilaterally adopt an alternative strategy of increasing production and driving down prices, with the idea of driving high-cost oil producers and US shale out of business. But this would also wreck the Saudi-led Organisation of Petroleum Exporting Countries. Riyadh’s response is to threaten to drive prices to such a low point that Russia will be forced back to the negotiating table.
If this game of hydrocarbon chicken plays through the year, India will count its blessings. But it must recognise that eventually prices will stabilise at a higher level. New Delhi must safeguard its renewable energy sector and redouble its efforts to gassify its economy. These continue to be the best bets to power India into a more secure and green future. The present instability in the global oil market further underlines the need to move away from the energy sources of yesterday.