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RSTV: THE BIG PICTURE- OIL PRICE WAR & IMPLICATIONS

RSTV

Introduction:

Opec and its allies led by Russia agreed on to cut their oil output 10m barrels per day, or 10% of global supplies. They expected the United States and other producers to join in their effort to prop up prices hammered in the coronavirus crisis. Reductions of 5m bpd are expected to come from other nations to help navigate the deepest oil crisis in decades.

Russia- Saudi Arabia oil price war:

  • Saudi Arabia initiated a price war with Russia, facilitating a 65% quarterly fall in the price of oil.
  • Over a few weeks, US oil pricesfell by 34%, crude oil fell by 26%, and Brent oil fell by 24%.
  • The price war was triggered by a breakup in dialogue between the Organization of the Petroleum Exporting Countries (OPEC) and Russia over proposed oil-production cuts in the midst of the 2019–20 coronavirus pandemic.
  • Russia walked out of the agreement, leading to the fall of the OPEC+ alliance. Oil prices had already fallen 30% since the start of the year due to a drop in demand. The price war is one of the major causes and effects of the currently ongoing global stock-market crash.

Impact on India:

  • This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.
  • Due to falling oil prices India’s macro-economic indicators such as inflation, current account deficit (CAD), and trade balance improved.
  • A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
  • India imports more than 83% of its oil needs, the price crash offers a breather on the macroeconomic front. According to estimates, a one-dollar decrease in crude oil price reduces the oil bill by around $1.6 billion per year.
  • The collapse in oil prices will cut the country’s import bill, and soften its current account deficit.
  • Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
  • Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.
  • Second, the additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
  • Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
  • Third, the potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
  • The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
  • The fall in crude prices will also help ease inflationary pressures that have been building up over the past few months. This will increase the space for the monetary policy committee to ease rates further.

On other producers:

  • In response to the drop in price, multiple oil producers in North America cut the drilling of new wells.
  • Shale oil producers in North America generally require oil prices above $40 per barrel to sustain operations, and the cuts in new oilfields is expected to nullify the expected growth in US oil production.
  • At $35 per barrel of crude oil, only 16 shale producers could operate new wells profitably, and most producers had expected a per barrel price of $55–65 in 2020. 10% of oil production globally would not be able to cover its base operating cost, particularly heavy crude oil producers such as Venezuela, Mexico and oil sands in Canada, where the price dipped below $5 per barrel.
  • The U.S. Energy Information Administration forecasts show that U.S. crude oil production would fall from 13.2 million bpd in May 2020 to 12.8 million bpd in December 2020 due to the price war, and would then fall to 12.7 million bpd in 2021

Conclusion:

  • The Indian economy is affected by demand slowdown, and industrial growth has been the lowest for the last couple of years. On top of that, the coronavirus has affected production supply chains.
  • In this context, the fall in crude oil prices is a relief for the Indian economy on fiscal, external and monetary fronts.
  • There will be some negative fallout on India’s petroleum exports—which form one of the top exports—and remittances (a large number of Indians work in oil-exporting countries like Saudi Arabia, and India is one of the biggest recipient of remittances from oil-exporting countries).
  • The price war between Saudi Arabia and Russia and the falling demand of oil from major oil-importing countries like China and India will keep oil prices from rising.
  • It’s a blessing in disguise for the Indian economy, which is currently grappling with severe slowdown and seeks a quick turnaround.