Dr Ashwani Mahajan
People in the country have got a sigh of relief, thanks to falling prices of petro-products in the past few months. Price of petrol in Delhi, which had reached rupees 76 per litre in September 2013, has come down below rupees 56.50 per litre now. It is notable that international price of crude oil has come down from $115 per barrel in July 2014 to only $48 per barrel by now. This has resulted in drastic fall in price of petrol and diesel and other petroleum products in the country. At the same time this has also relieved us from the problem of huge current account deficit (CAD) in Balance of Payment. According to a rough estimate, decline in international crude price by $10 per barrel, reduces our oil import bill by $10 billion. Resulting reduction in demand for dollars has also reduced stress on our domestic currency. Though, it may take some time to improve value of rupee significantly, with this new development; however support being gained by rupee has definitely relieved the nation from inflationary spiral. Today crude prices are at their lowest level in six years. It is notable that in December 2008, crude prices were at their bottom, near $30 per barrel.
How this downfall came?
Oil prices were being determined in the last more than four decades, at the whims and wishes of Organisation of Petroleum Exporting Countries (OPEC). OPEC consists of many gulf countries, Saudi Arab, United Arab Emirates, and Qatar etc. As and when international crude prices decline, these countries resort to reduce their production, in order to contract supplies. As a result, crude prices would start increasing again. Monopoly of OPEC in crude supplies was the main reason for high international crude prices. This time when crude prices started declining, an important member of OPEC, Saudi Arab, which used to reduce production with any decline in crude prices, decided not to reduce production. This happened for the first time, that despite fast declining crude prices, oil exporting countries have decided, not to reduce production, rather in some cases production has actually increased.
Now member countries of OPEC feel that if they decide to reduce production, likelihood of increase in crude prices is negligible. Reason for this thinking is that, in the past few years, many non-OPEC oil producing countries especially USA, have been constantly increasing their production. Today USA is producing nearly 9 million barrels of crude oil, as compared to only 5 million barrels four years ago. Initially oil producing and exporting countries thought that USA will be discouraged to produce more crude with fall in crude prices, as it would not be economical to do the same. However that didn’t happen. Due to falling crude prices, revenues of oil exporting countries have been badly hit and their budgets are in doldrums. Iraq, Iran, Venezuela and Gulf Countries are so much dependent of oil exports, that falling crude prices may impact their economies badly. On the other hand, even Canada has increased its oil production. Iran and Iraq have also been forced to increase their production to meet their revenue needs. Oil production in Libya has also resumed. On the whole we can say that, despite falling crude prices, both OPEC and Non-OPEC oil producing countries have increased supplies of crude oil and therefore there is a glut in oil production globally.
Any possibility of increase in Demand!
On the one hand, oil supplies are increasing, despite fast declining prices of crude, possibilities of increase in oil demand are negligible. But for a small growth rate of 1.5 percent in Germany, near economic stagnation all over Europe, receding growth of China are all sending signals for dip or stagnation in demand for petro-products. Rising threats to environment due to more use of fossil fuels, is yet another reason for decline in demand for oil in future, Therefore rising supplies on the one hand and declining or near stagnant demand for oil, rule out any increase in crude prices in near future.
Good News for India
Saudi Arabia, which used to fast adjust its crude production with any fall in crude prices, to pop up prices, this time, has plainly refused to reduce its production. It is being said that Saudi Arab’s present strategy is aimed to put Russia under dis-advantage and for this it in conniving with USA. This is because in the past, Saudi Arab lost a big chuck of market in the hands of Russia, which it could never recover. Alongside Saudi Arabia’s enmity with Iran, is yet another reason for their strategy, as declining prices of crude is badly affecting Iran. Another school of thought is that, by reducing prices of crude oil, Saudi Arab is trying to stop USA to become world’s largest oil producer.
Whatever may be the reason, whether international rivalry or diplomacy; declining prices of crude is a sending good news for India. For the first time after 2007-08, our Current Account Balance of Payment, could turn into surplus, in the last quarter of the financial year 2014-15. Declining prices of petroleum products has not only given a sigh of relief to the common man, industry and agriculture; if is also tightening the noose on the oil producing Islamic nations, who have been using petro-dollars to fund terrorism all over the world. We can expect more good news for peace loving countries like India and perhaps a bad news for many OPEC countries, who have been directly or indirectly financing terrorism.
( The author is Associate Professor, PGDAV College, University of Delhi)
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