Why oil prices are falling in India? What is the impact of declining oil price on you? Is there any chance of oil price going down further?
As you are aware, the price of any commodity is decided based on the demand-supply situation. In the past decade, there were lots of geo-political issues in the leading oil producing countries like Iraq. This has resulted in the reduced oil production by such countries. The Organization of Petroleum Exporting Countries (OPEC) was using limited production as a means to create an artificial demand for oil to demand high prices. The huge demand for oil from countries like China, India and US was another reason for the prices to stay above $100 per barrel.
Shale Oil – the game changer
When the price of oil was maintained at these high levels, countries like US and Canada went ahead with the oil exploration activities. They were successful in drilling oil from shale formations. This has helped countries like US and Canada in reaching self-sufficiency in oil to some extent. As the demand from US and Canada is reduced, there is a surplus in the market which forced the oil prices to correct. The demand for oil from China and European countries has also reduced due to the economic slowdown in those areas. OPEC used to cut production to offset the reduction in demand, but this time they are not doing it. Oil prices have corrected by almost 60% this year and are trading at around $50 per barrel now.
But, if the oil price is stabilising at around $50 per barrel, it will force many shale oil companies in the US to close down their operations as the cost of production of shale oil is much above $50 per barrel. This is also one of the reasons why OPEC is not reducing the production. They want to wipe out the shale oil companies from producing and to retain the monopoly in oil production. With a huge foreign exchange reserves, countries like Saudi Arabia can afford to do this.
How the low oil price will benefit India?
India being one of the largest importers of oil will benefit from the fall in oil prices. We have seen many price cuts and another cut on 15th January. The price fall will help in reducing the import bill and result in savings of foreign exchange, which in turn will help in reducing the current account deficit (CAD) of the country. Lower oil prices will help in reducing the high inflation in the country. This has prompted the Reserve Bank of India to reduce the Repo rate by 25 basis points on 15th January, 2015 in a surprise move much ahead of the expectation of the market. This will help the Indian economy in a big way.
The falling oil prices will boost many sectors which are benefited directly or indirectly. The sectors like automobiles, plastics, chemicals and paints will be the major beneficiaries. There will be some sectors which will be affected due to the lower prices. They are the upstream oil and gas companies. Companies which are vendors for the oil and gas sector also will be impacted due to the slowdown. Oil drilling and exploration companies also will be negatively impacted due to low oil prices.
But too low a price like $50 per barrel is not good for a country like India. This has some adverse impact on the export business. This is because we have a good share of trading relations with the countries in the Middle East which are the leading oil producers in the world. The lower oil prices will affect their economies in a huge way and this will affect their buying capacity. India is getting huge inward remittance from the overseas Indians who are predominantly working in these oil producing countries. This can be affected if the lower level persists for long.
A price in the range of $70-$75 per barrel will be an ideal price for a country like India.
Oil Price and World Economy
The adverse impact of this on the world economy is already visible with a high level of volatility in equity markets in most of the countries in the month of January 2015. But lower prices will help India in the long term. India is better poised compared to other emerging countries and this can be a better destination for FIIs in 2015.
The low oil price can affect the world economy in a big way. The adverse effect on the economies of the oil producing countries is much more than the benefit of low cost on the consuming countries like India and China. Countries like Russia and Venezuela are in deep trouble due to the low oil prices. Saudi Arabia and other Middle East countries may sustain for some time due to their huge foreign exchange reserves, but will suffer in the long term. Their economies are dependent mainly on oil exploration.
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