Economic growth may be affected by high oil prices

Economic growth may be affected by high oil prices

Brent crude oil price has been surging and has hit its highest in more than two-and-a-half years due to supply concerns arising from escalating violence and protests in Libya after Cairo (Egypt), dollar depreciation and rising demand. We are still cautious on geo-political issues which can affect crude oil prices in the short term.

According to the US Energy Information Administration, global oil product demand for 2010 and 2011 is revised up by 120,000 barrels of oil per day mainly due to higher-than-expected demand in non-Organisation for Economic Co-operation and Development (OECD) Asia and improved economic prospects for OECD North America. In January, Organization of the Petroleum Exporting Countries crude supply increased to two-year highs at 29.85 million barrels per day while Iraq’s crude oil supply increased substantially. Saudi Arabia has assured that it will fill the gap if there is any supply disruption from Libya.

The long lingering concern for India was the payment to Iran for crude oil imports which has now been settled. As on 1 March, payment of €1.5 billion has been made to the Central Bank of Iran.

We believe the recent rapid surge in oil prices will have a negative impact on the world economic growth, especially to the emerging economies such as India, China and Africa. For India, higher oil prices lead to inflation, a fall in tax revenues and an increase in the budget deficit.

Edited excerpts from a report by Kotak Securities. Your comments are welcome at