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Why dipping oil price may not mean cheaper fuel

With fears of a recession in developed economies and covid curbs in China, demand for oil has been declining. Photo: Reuters
With fears of a recession in developed economies and covid curbs in China, demand for oil has been declining. Photo: Reuters

Summary

  • With the global economy slowing down, crude oil prices fell as low as $76.1 in the first week of December.

New Delhi: Oil prices that shot up after Russia invaded Ukraine in March plunged as low as $76.1 early December, bringing cheer for the economy. However, retail customers may have to wait longer for relief. Mintanalyses the implications of cheaper oil for the Indian economy.

What has been the trend in oil prices?

Crude oil prices which touched rock-bottom when the covid pandemic broke out in 2020 have gained steadily since then, as the world made progress in the battle against the coronavirus. However, with the onset of the Russia-Ukraine war in February and following supply chain disruptions, oil prices began climbing, peaking at $127.98 in March. With the global economy slowing down, crude oil prices fell as low as $76.1 in the first week of December. Supply chain tensions due to the war in Ukraine seem to have lessened and demand concerns have come to the forefront.

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How does changing oil price affect India?

Crude oil is the basic input for petroleum products like diesel, petrol and aviation turbine fuel. These petroleum products directly or indirectly impact every economic activity, and without crude oil, the economy would grind to a halt. India is the world’s third biggest oil consumer, importing about 84% of its domestic requirement. Its crude oil import bill in FY22 was $119.2 billion. Every dollar of increase or decrease in oil prices has an impact on India’s import bill. High oil prices in March 2022 resulted in India spending $13.7 billion in March 2022 as against $8.4 billion in March 2021.

 

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What is behind the falling trend in crude oil prices?

With fears of a recession in developed economies and covid curbs in China, demand for oil has been declining. After Russia invaded Ukraine, Western countries began pressuring oil importers to reduce purchases from Russia. However, many nations have been exploring opportunities which benefit their citizens and have continued to import at concessional prices.

What is in store for the Indian consumer?

With the rupee continuously falling, benefit of cheaper oil gets substantially offset. Moreover, oil marketing companies have been absorbing part of the burden during the rising trend, resulting in their profit margins drying up. Obviously, now they would like to recover their past losses. Thus, on an immediate basis, there might not be proportional relief to the consumer. However, if the trend continues and oil companies recover fiscal balance, certainly it would be good news for consumers.

What are the other benefits to economy?

Lower import bill will help save foreign exchange reserves which, in turn, would have a positive impact on current account deficit. It would also mean the supply of forex reserves going up and consequently, the rupee gaining strength. That would improve the overall import capacity of the country. In the long run, a falling trend in prices of crude oil is music not only to the Indian consumer and producer but also for policy makers in the government.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH.

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