Falling oil prices: Who are the winners and losers?

PRESENTED BY: PRAVESH KASWA NARENDRA PRAJAPAT

BHARAT S INGH S ISODIA

ContentIntroduction

Reasons of Falling Oil Prices

Impact of Falling Oil Price◦ Positive◦ Negative

Impact on Indian Economy

Introduction Crude price is trading below the $100 psychological level. As everyone knows Crude oil prices play a very significant role on the economy of any country. India’s growth story hovers around the import of oil as India imports 70% of its crude requirements.

Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.

From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved. Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $43.37 a barrel.

Reasons of Falling Oil Prices 1. US oil production is booming: Exploding US oil production has transformed one of the world’s leading oil consumers into one of its leading producers as well – in fact, North Dakota alone produces a million barrels of oil per day. US production now rivals oil giants Saudi Arabia and Russia, largely thanks to innovative drilling that has unlocked oil and natural gas deposits trapped in shale rock.

2. Saudi Arabia isn't budging: As a leading producer, pumping nearly 10 million barrels of oil a day, Saudi Arabia has outsize influence in the oil markets. And so far, the crude powerhouse has indicated it’s willing to ride out lower prices so as to avoid losing customers to US producers or other competitors. It’s a strategy of maintaining market share until the price of oil rises again.Other less stable members of the Organization of Petroleum Exporting Countries (OPEC) reject Saudi Arabia’s strategy. Venezuela, for example, would rather cut production than take a reduced price for its oil.

3. Asian demand has dropped off: The US is producing record amounts of oil, and there’s plenty of supply out of OPEC and Russia. But there’s not enough demand from developing economies – think China and India – to consume all the oil that’s being supplied. A global recession has left Asian demand weaker than expected, and governments are slashing fuel subsidies across Asia. That drives up the cost of gasoline, diesel, and other everyday fuels, further dampening demand in a region that will largely determine the future of global oil markets.It’s not just Asia, though. Austerity measures and decreased consumption across Europe are curbing oil demand throughout that continent, too.

4. The US dollar is strong: Oil is bought and sold in US dollars

across the globe. When the dollar gets stronger (as it has over recent months), it makes oil more expensive to buy in countries outside the US. That, in turn, weakens worldwide demand and further puts downward pressure on oil prices.5. Libya and Iraq are back: On top of burgeoning US output, oil production from typically volatile regions has been surprisingly stable. Libya, Iraq, South Sudan, and Nigeria have all maintained production despite the threat of instability, flooding the market with oil at a time when demand is low.

Impact of Falling Crude Oil Prices There will be winners and losers, but economists are divided on the overall impact. Falling oil prices could be “a shot in the arm” for the global economy, according to the International Monetary Fund. The fund estimates the recent drop in oil prices could add up to 0.7% to global economic output in 2015.

But not everyone is convinced. Falling oil prices have coincided with a sharp appreciation in the dollar, which is a growing economic headache for many emerging economies, such as China and Brazil, while Russia has been hit hard due to its dependence on oil revenues.

The fall in crude oil price is good for all users, including major importers like India, as it lowers their trade deficit and hence strengthens their currencies. However, for the oil exporters, this is bad news as it lowers their export earnings, and given that most countries are dependent on oil exports, their growth would suffer.

Positive Impact on Economies Simply put, at the country level, fall in oil prices will benefit net importers, while exporters would be worse off. However, at the aggregate level, fall in oil prices is said to be a positive for the global economy. Recently, Christine Lagarde, managing director, International Monetary Fund, on the issue of decline in oil prices was quoted as saying: “Assuming we have a 30% decline (in oil prices), it’s likely to be an additional 0.8% (in economic growth) for most advanced economies, because all of them are importers of oil.”

Negative Impact on Economy Falling oil prices have coincided with a sharp appreciation in the dollar, which is a growing economic headache for many emerging economies, such as China and Brazil, while Russia has been hit hard due to its dependence on oil revenues.

As the price of oil extends a free fall that began this summer, countries around the world that rely on oil revenues are bracing for an imminent economic and budget hit.

The drop is widening budget gaps in the Gulf states like Saudi Arabia, the United Arab Emirates, Qatar, Oman and Bahrain that rely heavily on oil to pay government services.

Impact on Indian Economy India imports more than two- thirds of its requirement, which constitutes around 30 percent of total imports. A fall of one-dollar in the price of oil saves the country about Rs 40 billion. Adding to that the fall in international oil prices will reduce subsidies that help sustain the domestic prices of oil products (LPG, kerosene).

The fall in international oil prices will reduce subsidies that help sustain the domestic prices of oil products. Petrol prices are already decontrolled. The more commonly used diesel has been subject to staggered deregulation since September 2012.

In September last year, the difference between domestic and international prices of diesel will be only 8 paise per litre, which can make diesel eligible for deregulation in about a month.It is kerosene and liquefied petroleum gas (LPG) that are still heavily subsidized. And looking at the mood of the government, they are unlikely to be market-priced in the near future. The total subsidy on petroleum products in 2013-14 was 854 billion rupees and it will be reduced to the extent the international price of crude declines. Also, a recent research report says that a 10 percent decline in oil prices could reduce retail inflation (Consumer Price Index-based inflation) by around 0.2 percent and push up the gross domestic product (GDP) growth by 0.3 percent.

But on the flip side, analysts are also highlighting the potential downside risks associated with lower oil prices. It would be wrong to ignore implications of falling oil prices on markets and the way businesses and companies operate. Many oil projects will face shutdown if black gold retains current levels or slides further, they opine.Current Situation: Oil imports during July, 2015 were valued at US $9486.93 million which was 34.91 per cent lower than oil imports valued at US $14574.45 million in the corresponding period last year. Oil imports during April-July, 2015-16 were valued at US $ 34144.90 million which was 37.91 per cent lower than the oil imports of US $ 54991.04 million in the corresponding period last year.

The Link Between Oil and Economic Development

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