THE CRUDE OIL BALM
After reaching a high of over $86 a barrel on October 3, oil prices have swung to their lowest in the year. On November 23, Brent crude prices fell to $58.80 a barrel, the lowest in a year. The immediate reasons are higher shale oil and gas output in the US, higher crude production in Saudi Arabia and a falling demand for oil globally, led by China. A World Bank report says oil prices are expected to average around $74 a barrel next year, and in 2020 around $69 a barrel as US oil production increases over time.
The current price dip has come as a relief to the Narendra Modi government. Historic price highs in the past two months had threatened to stoke inflation, since petrol and diesel have a combined weight of around 4.7 per cent in the Wholesale Price Index. It also widened the Current Account Deficit (CAD) and weakened the rupee. In October, the Centre cut fuel prices by Rs 1.50 a litre and asked oil marketing firms to slash retail prices by another Re 1. There had been speculation of rising oil prices upsetting fiscal discipline close to the general election.
A $1 reduction in crude prices will lower India’s import bill by $1.6 billion per year. India, the world’s third largest consumer of oil, imported $108 billion worth of crude in 2017-18. The lower import bill in the current fiscal due to the crude price fall will see a softening of the CAD. And with the rupee strengthening and inflation stabilising, interest rates will soften. However, states’ revenues could take a hit. “With the sudden fall in crude oil prices, we do not foresee a change in central revenues, but there could be a potential decline in the revenues of states, given that the extra revenue earned—when crude prices had risen—will be negated to an extent,” said a Care Ratings report. There is reason to cheer for now as prices fell to around Rs 80 for petrol in Mumbai and Rs 72.56 for diesel on November 26.