The sharp drop in crude oil prices has put the wind back into many sails. Global markets have rallied and there are hopes that economic stress in many parts of the world will ease.
Few seem to really ask why oil prices have dropped and what all this really tells us about the state of the global economy. Elementary economics tells us that prices of goods fall when either supply increases, or demand falls.
In the case of oil right now, it is the latter. More of the stuff is not being pumped out of the ground; less is being consumed. Why? Because the global economy is slowing down. Good news? Hardly.
As far as India goes, lower oil prices do offer some breathing space. Raging oil prices have done ample damage to both the trade and fiscal balance. But oil prices have to fall much more—below $100 (Rs4,200 today) a barrel perhaps—for the Indian economy’s fundamentals to get back into safe territory.
So, the drop in oil prices is not all good news.