May 28, 2022
The CBS Post


Crying Over Spilled Oil

After the COVID19 pandemic, the members decided to cut 1.5 million barrels per day from global production, adding to the cuts they had already made previously.

After the outbreak of the COVID-19 pandemic, cities idled out with no one to purchase crude oil and air travel sharply declined. As a result, the supply of crude oil outstripped its demand and it started piling up, with nowhere to be physically stored. This abrupt decrease in the demand led to a sharp fall in crude oil prices, initially from over $60/barrel to $20/barrel, and soon a crash to a record low falling within the negative territory for future oil contracts followed.  OPEC (Organization of the Petroleum Exporting Countries) is an organization of 13 of the world’s major oil-exporting nations, mainly dominated by Saudi Arabia. It has a major influence on global oil prices since it is accounted for almost half of its production. After the COVID-19 pandemic, the members decided to cut 1.5 million barrels per day from global production, adding to the cuts they had already made previously.

The price-war between Russia and Saudi Arabia is to be held partially responsible for the same. Russia refused to cut the proposed amount, triggering the price war and OPEC retaliated by increasing oil production back up, worsening the already dire situation. As the pandemic stretched on, it decreased the demand for oil by 30% and the slump in price threatened millions of jobs, as well as the stability of nations worldwide. After the intervention of US President, Donald Trump, the United States, Russia and the OPEC nations brokered a deal for the coordinated production cut of 10% from the global oil production.

India, along with Japan, China and South Korea, form the largest demand bloc in the world for oil. Oil being India’s major import (importing 86% of its annual oil requirement), this crash would have a significant amount of impact on India as well.  This historical plummet in the oil prices may be a relief for the Indian economy as it would help current account balances, which are already running low, overcome the current fiscal deficits. Improving the current account deficit will cause rupee appreciation.  A decrease in oil prices wouldn’t affect foreign exchange reserves, and might even help soothe inflation.

According to a report by MoneyControl, a fall of $10 per barrel in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5% in India. To compare, Indian inflation rate is nearly 5% so this cut is nearly 10% on inflation.  An impact on the Indian financial markets will be felt as well, as energy stocks have 12% in Nifty50 and 15.2% in the Sensex. This fiasco has helped Indian oil refiners to buy cheap crude oil and the country to fill up the strategic oil reserves with cheap oil as well.

Crude oil prices affect industries that are dependent on fuel and petroleum by-products such as tyre manufacturers, footwear, lubricants, paints, and airline companies. A fall in oil prices will drive cost lower and stock prices higher. If the plunge in crude actually translates into lower petroleum and diesel prices, the transportation cost will decrease significantly, further driving up profits for the businesses.  On the other hand, this drop in price may not be as lucrative for Indian refiners owing to the ongoing impact of COVID19.  As a result of the nationwide lockdown, there is a very limited demand for oil. This has adversely impacted the revenue of petroleum and oil companies in India. Being unable to find extra storage spaces, they will have to cut their production as well.

As for the consumers, retail prices are unlikely to come down, as a large portion of these prices is made up of government taxes. Low crude oil prices would help the Government raise oil-related taxes to offset other losses of the pandemic.

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