Crude Oil Crisis and its Impact on Indian Economy

Let’s read this article on Crude Oil Crisis and its Impact on Indian Economy…

What do you mean by the crude oil crisis?

A sudden surge in the price of oil due to the shortage of supply and high demand is the reason behind the crude oil crisis. Such phenomenon takes place in adverse situations like- during a war between two or more nations, sanctions imposed by a country on another country, limited reserves, government mismanagement, etc. It is a bottleneck in the supply of energy resources of an economy.

Since Crude oil is the largest exported product of the world. It is essential for the growth of an economy. It plays a crucial role in all the sectors of production viz. it is used as diesel fuel in pump sets for irrigation, in tractors for plowing till the harvesting process. A large number of industries and transportation sectors are running on petrol and diesel. It is a ladder through which country progress and provide maximum benefits to its citizen.

Global Distribution of Crude Oil –

Major oil exporters of the world are Saudi Arabia, Russia, the US, Iraq, Iran, Kuwait, etc. There are three large players in the global market, with 18% -19% the US has the highest share in global output followed closely by Russia and Saudi Arabia, each with a 12% share. Russia is the world’s second-largest producer of oil, as well as the second-largest exporter. Within OPEC Saudi Arabia, is the largest crude oil producer and exporter. Together these three control almost 45% of all oil.

Venezuela has the world’s largest oil reserves but produces less than its capacity. The country’s oil production is severely affected by the government’s mismanagement and harsh US sanctions. Oil-producing companies are in debt and most don’t even have good quality drilling equipment. Their cost of production and transportation are very high. Also, Venezuela oil has more impurities and it requires more complex types of refineries whereas Russian supplies are not only the second biggest and cheapest but also of better quality in comparison to Venezuela.

World’s Crude Index –

Brent Index-

The index represents the average price of the traded oil market. Brent is the leading global price benchmark for Atlantic basin crude oils around Northwest Europe.

West Texas Intermediate-

West Texas Intermediate is the benchmark used for US oil prices. The WTI oil grade is also known as Texas light sweet.

A Few Instances of Crude Oil Crisis –

Kippur war of 1973- Yom Kippur war, also called the Ramadan War, the Arab-Israeli war of October 1973. The participants were Egypt, Israel, and Syria. The combat between the two sides took place in the Sinai peninsula and the Golan Heights- both of which were occupied by Israel. In response, Egyptian forces occupied the Suez canal, a land route connecting Asia to European countries, which resulted in the disruption of the supply of various essential commodities including crude oil from the Middle East. This supply-side disruption further aggravated the problem of the crude oil crisis with hiked prices.

Drone Attack on Saudi Arabia’s Oil Field- The drone attack on the Abqaiq and Khurais oil field of Saudi Arabia’s Aramco refinery by Houthis, a Shia rebel group of Yemen had severe implications for the whole world. Saudi Arabia is one of the top oil exporters in the world and a dominant member of OPEC+ countries. This situation created shock waves for countries like India which imported around 80% of the oil it consumes and is mainly dependent on Middle East Nations for their oil demand.

Russia- Ukraine War-The most immediate trigger for the spike in oil prices is the possible decision by the US and other European countries to ban the purchase of Russian oil and natural gas imports in response to the invasion of Ukraine. As Russia is the world’s second-largest oil producer and if its oil is kept out of the market it will lead to hikes in oil prices. 

Crude Oil Crisis and its Impact on Indian Economy-

Soaring crude oil prices are bound to have a significant impact on emerging market economies including India. It can cripple the growth of our economy. Serious impacts on the Indian economy are as follows:

Inflationary Impact-

There is going to be an inflationary impact,  India imports more than 80% of its oil requirement,  but the share of oil imports in its total imports is around 25%.  High crude oil prices contributed to the increase in petrol and diesel prices that hit record highs. Inflation through higher energy and commodity prices will result in the disruption of international commerce.

The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene pushing up the subsidy bill, and high electricity costs, which forced the government to opt for fiscal stimulus. The key channel of impact for the economy will be higher cost-push inflation, leading to broader price pressures on all economic agents- households, business industries, the Transport sector, the government, etc.

High Current Account Deficit-

Rising oil prices will impact the Current Account Deficit (CAD) where our import bills are continuously rising, creating problems for our exporters. According to Morgan Stanley Report- A 10% rise in oil prices would widen India’s CAD by 30-35 bps of GDP. 

Balance of Payment (BoP) to be in a deficit of approximately 0.5-1% of GDP because capital flows are likely to be lower than the CAD.

Lead to Depreciation of Rupee and Widen Loss of Forex Reserve-

A sustained rise in oil prices led to high currency volatility. Higher CAD will result in a huge fall in the value of our Indian Rupee leading to depreciation against the global currencies, especially the Dollar. High Exchange Rate Volatility will risks for economy resulting in the loss of Indian Forex Reserves.

Stock Market Instability-

Hike in oil prices will result in the crashing of the stock market, creating uncertainties among investors. The decline and volatility in the equity market will lead FPIs to turn their shares into cash and will leave the market. This HOT money occurrence could post hurdles to the growth of India and will result in a down rating of the Indian corporate sector in the global market.

Problem of Stagflation-

Rising crude prices could raise fears of stagflation, a combination of stagnant growth and high inflation. It happens when demand is down and the economy is in doldrums, prices tend to stagnant or even fall.

 Deterioration in Macro Stability-

Rising oil prices will lower the tax collection of the government. This will result in high tax borrowings for subsidy burden and other welfare schemes. It further pushes for Fiscal Stimulus which is not a good way of funding and has a long-term impact on the economy. 

Way Forward- Measures to take Steps-

Enhance Country’s Self-Sufficiency in Oil Production-

Permit oil exploration license to Indian industrialist for more oil production. Our government has already taken steps in this direction. Domestic oil exploration policy HELP (Hydrocarbon Exploration and Licensing Policy) was introduced to explore and produce all types of hydrocarbons from a given area. Also, OLAP (Open Acreage Licensing Policy) will allow oil companies to go for more exploration. The main advantage of OLAP over NELP is that of having no cess, reduced royalty rates, marketing freedom, etc.

Focus on Export Oriented Production-

We should focus on export-oriented products to prevent the depreciation of the Indian rupee. India is naturally a blessed country in the production of wheat, rice, jute, cotton, spices, etc. So we should focus on the items made up of these things. India has also expertise in IT exports, software services, etc. By exporting these goods and services we can earn dollars in exchange for the Indian rupee and enhance the capacity of our forex reserves.

Biofuel Blending in Petrol-

Ethanol Blending– India targets 25% ethanol blending in petrol till 2025, which is a good decision by the government to reduce our dependency on crude oil and open opportunities for our farmers and climate resilience too. 

Green Hydrogen- It can solve critical energy problems. Green hydrogen produced using renewable energy can be blended with grey hydrogen which enhances green hydrogen production capacity. To widen the use of green hydrogen, it can be blended with Compressed Natural Gas (CNG), petroleum refining, etc. India has a large growing capacity base in green hydrogen that will reduce vulnerability to oil and natural gas price shocks.

Other Measures-

• The government should lower the excise and VAT duty structure on petrol and diesel to reduce the pinching of rising in crude oil prices.
• The Monetary Policy Committee (MPC) of RBI should take an appropriate policy instance amid soaring crude prices in order to curb the repercussions of inflation.
• During a shortage of oil, the government can use buffer stock but it is not sufficient for a large country like India.
• Focus on the development of renewable energy in solar, wind, hydro, etc., and generate awareness on energy conservation.
• Should focus on Electric Vehicles (EVs).

Conclusion on Crude Oil Crisis and its Impact on Indian Economy-

The government shold expand its safety net amid the soaring prices of crude oil. Focus on creating more opportunities for the country’s economic development and cubing the different issues arising due to rise in the prices of crude oil. 

India should take prudent steps as early as possible else the rising crude prices will mark a long term footprint for economic crises which would be difficult to tackle in near future.

 

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