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What if oil climbs back to the $80 or $100 a barrel?

05 Sep 2016 |By: Team Finalaya

Oil Barrel Prices

Oil importers including India have been enjoying the party, thanks to the subdued oil prices. In the Indian context, the savings from low oil prices translated to about $30 billion in 2015 alone. Add to that the numbers for 2016, which is expected to be marginally lower, and we can confidently say that the Indian economy has got a shot in the arm. The immediate term benefits from this were:-

  • Consumers pay less for fuel
  • Oil companies have become healthier
  • Reserve Bank of India could manage inflation better
  • Rural infrastructure spending went up

Can the party go on?

There can hardly be a one-word answer to this question. But, what is for sure is that, for long, OPEC enjoyed the position of a ring leader in the oil market. It had the ability to dictate market movements, contract or enlarge supplies and literally write the price movements from the bedroom. For now, OPEC is unable to call the shots and member nations are nursing large bruises.

The shale storm

But, once the United States of America unleashed the shale storm, it brought down the dreams of not just OPEC and its members, but also other major oil exporters like Russia, China, Canada, and Mexico. Understandably, the USA started importing significantly less oil. The OPEC nations lead by Saudi Arabia started feeling the heat and soon found itself among the gallery audience watching helplessly, the game progressing inflicting more pain than any sign of relief.

Current Account Deficit

One of the huge benefits from falling oil prices for the Indian economy has been with regard to its current account deficit. As at August 2016, the CAD stands at about 1.5%. If oil prices surge beyond the $50 mark, the CAD can potentially take a hard hit. Moderate fluctuation for a week or two, however, will be absorbed by the cushion already built into the system.

Inflation

Even with moderate single digit inflation, the Reserve Bank of India holds the view that more is needed to designate the Indian economy as healthy. Any surge in oil prices will invariably bring the cost push effect across a wide spectrum of goods and services making inflation control even more difficult for the government.

Subsidy burden

Riding piggy bank on the back of falling oil prices, GOI has taken the bold step of slashing the overall subsidy bill to about 4% of GDP. This is a huge measure considering that, in the past, subsidies with particular reference to fuel subsidy consumed a significant share of the overall budget. If oil prices revert to the $80 or $100 mark any time soon, fuel subsidies may need to be restored.

Oil marketing companies

Before the oil prices started climbing down, oil marketing companies carried the burden of subsidies because reimbursement from the government was invariably delayed and often partial. Presently, the major chunk of subsidies flowing through the OMCs relates to domestic gas and kerosene. With the introduction of DBTL, the OMCs get the subsidy component in hand from the customer and later transfer it back via the DBTL scheme. This saves the OMCs from perennial cash flow problems of the past.

The aam aadmi

The government will be quick to forget that it has extracted more than its due share on petroleum products during the good days. Yes, although petroleum products are expected to be priced at par with international crude prices, the aam aadmi is getting only a fraction of the gains. The rest is sucked by various taxes and duties.

Conclusion

If oil prices do climb back, you should expect to pay more for your fuel because international parity will wake up to haunt you. Further, it will also reverse all the benefits currently being enjoyed, dealing a body blow to the national economy.

Let us hope the party continues!

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