Oil’s rise affects India

Oil’s rise affects India
For the first time in three years, the price of oil reached a record high of $70 per barrel. The last time oil was valued this much was in December 2014. The rise in prices is partly due..

For the first time in three years, the price of oil reached a record high of $70 per barrel. The last time oil was valued this much was in December 2014.

The rise in prices is partly due to production cuts by the OPEC. However, OPEC quite possibly may be concerned over the rise themselves as they would not want to lose ground to US shale market. There are also repercussions in the Asian markets, especially India where the price of Diesel recently hit a record high.

Background

Oil prices have been one of the most watched trends in economics during the 21st century. From 2000 to 2008, the price of oil saw an unprecedented spike, going from under $25 per barrel to almost $150 per barrel. Rapidly increasing demand in emerging economies such as China and India and production cuts by the Organization of Petroleum Exporting Countries (OPEC) in the Middle East drove the price of oil to its record heights.

Numerous factors contributed to the 2014 drop in oil prices. Economies such as China, whose rapid growth and expansion created an unquenchable thirst for oil in the first decade of the new millennium, began to slow after 2010.

In July 2017, the OPEC nations met once more to discuss plans on whether they should further cap oil output by 1.8 million bpd beyond March 2018. The meeting was held in Russia and was attended by non-OPEC oil producing countries as well. During this meeting, Saudi Arabia, announced that it will limit its oil exports to 6.6 million bpd (barrels per day). This is a million-bpd lesser than the previous year. On December 2017, OPEC as well as Russia announced that the nations would continue to maintain the output cut till the end of 2018. This was done in a bid to ensure global oil prices do not collapse.

 

Analysis

The price of oil reached a record high of $70 per barrel. The last time oil was valued at around $70 was in December 2014. Experts have noted that this is in part due to production cuts by the OPEC. The group recently decided to maintain the production cut till the end of 2018. The price of a barrel of Brent crude hit $69.37 on Wednesday, the highest amount since December 2014.

However, the rise in oil prices may not come as entirely good news for the countries part of OPEC as well as Russia. These countries were reportedly hoping to maintain prices at $60. They are concerned about the competition posed by the US shale market. America has also emerged as a formidable player in the crude oil production industry. It has continued to increase its production of shale oil. Research firm Rystad Energy has predicted that the US is likely to ramp up crude oil production by 10% in 2018 to about 11 million barrels per day. Some experts state that its production is likely to even surpass Saudi Arabia and Russia, which currently are two largest producers in the industry. However, Thursday's rise was also bolstered by a surprise fall in US oil stockpiles. The US Energy Information Administration on said crude inventories fell by almost five million barrels to 419.5 million barrels in the week to 5 January. Oil analysts at Petromatrix said: “Russia and Saudi Arabia have managed to support prompt oil prices, but at the cost of making the US the world’s largest oil superpower.” 

There are also repercussions in the Asian markets, especially India where the price of Diesel recently hit a record high. The price of oil in Delhi has reached an all-time high at Rs 60.66. Petrol price too shot up to Rs 70.53 a litre. The main reason is the relentless rise in global oil prices. India’s oil minister Dharmendra Pradhan stated that it was up to state governments to provide some relief to Indians. He stated, “It's not just the Centre that taxes fuels. States also benefit from tax on petrol and diesel. The Centre has reduced excise by Rs 2 a litre. States should show their concern by reducing VAT (value added tax).”

Between November 2014 and January 2016, India’s Central government cumulatively raised the excise duty on petrol and diesel. The cumulative excise duty on petrol was increased by Rs 11.77 per litre and in case of diesel it was increased by Rs 13.47.

Assessment

Our assessment is that the rise in oil prices will not only be regarded a challenge by OPEC nations but it will also be a massive problem for developing nations like India. The Indian government had recently revealed that the country’s economic growth will slow down in 2018. In October 2017, the central government cut excise duty, however, this has not resulted in controlling the rising price. This will further pinch pockets of the nation’s population – many of whom hail from low income households. There are some reports that suggest that by 2050 the price of a barrel of crude oil will be $120. 

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