HT explains: The flip side of falling global oil prices

Hindustan Times | ByAnupama Airy, New Delhi
Jan 07, 2015 03:03 AM IST

While consumers and the government are cheering the fall in global oil prices resulting in cheaper petrol and diesel, oil-producing nations are in a quandary. HT helps you understand the dynamics.

While consumers and the government are cheering the over 50% fall in global oil prices resulting in cheaper petrol and diesel, oil-producing nations are in a quandary. HT helps you understand the dynamics of this free fall.

HT Image
HT Image

What has been the trend in oil prices?
Since 2010, global oil prices have stayed above $100 a barrel level. Among the reasons attributed to this trend was the higher consumption patterns by importing nations like China and India. Also, the geopolitical tensions in nations like Iraq and Libya too kept the prices high. As oil producing nations could not keep up with the demand, prices soared and hence the spike was attributed to this gap. Till June 2014, the global oil prices were hovering at $115 a barrel in contrast to the present levels of $52-53 a barrel.

What has been the impact of the sudden fall in global oil prices?

While the trend has cheered most oil guzzling and importing nations like India, China and Japan, the unexpected fall has also caused havoc for oil producing nations, including the top Gulf producers and also other countries like Russia and Venezuela.

Why a sudden fall in oil prices?
By 2014, the world oil supply was on track and in line with the demand. However, over the past few years, countries like the United States and Canada in order to reduce their over dependence on imported oil started exploring other alternatives such as shale gas. Shale usage in US and Canada coupled with the weakening of economies in Asia and Europe led to a sudden fall in oil demand. So while producers, including the major oil producing Gulf nations, resorted to higher production, a weaker demand led to the fall in oil prices. From September onwards, crude oil prices have been plummeting and have fallen to more than 50%.

Did OPEC play any role in combatting the fall in oil prices?
As oil prices continued to slip onwards of September 2014, experts and analysts hoped that OPEC – group of major oil supplying countries including Saudi Arabia and Iran – at its crucial meeting in November 2014 would intervene and arrest the falling trend. However, much to everyone's surprise OPEC did nothing and rather decided against cutting back production. This came as a big trigger and oil prices went into free-fall.

What are the ramifications of this unexpected fall on the global economy?
The free fall in global oil prices has an impact on every country in the world. While for the economies of large consuming nations like China, India, Japan and the US, the fall in oil prices is an excellent news. However, suppliers of oil, including large economies like that of Russia and Venezuela, are facing a potential threat. Most of oil producing nations will face serious unrest if oil prices stay low and the fall continues.

How does the fall in oil prices affect India?
India imports nearly two-thirds of crude oil requirements. The sharp fall in global crude oil prices will cut down the country's import bill and enable oil marketing companies to reduce retail prices of petrol and diesel. Lower oil prices have also aided government's efforts to keep inflation low and stable besides curtailing fuel subsidies. A lower subsidy bill will help contain the country's fiscal deficit — a measure of the amount the government borrows to fund its expenses — at the budgeted level of 4.1% of GDP in 2014-15. Being the world's fourth-largest oil consumer, India imports around 190 million tonnes of crude oil a year - costing $145 billion a year, or more than a third of its total import bill. With every dollar decrease in oil prices, the government's oil import bill comes down by Rs. 4,000 crore.

Decoded: Shale gas

It is a natural gas found in shale formations – a type of rock in the earth's crust. It is being considered as the new source of natural gas as other sources are fast depleting. US is at the forefront of exploring and producing shale gas. It accounted for 39% of its natural gas production in 2012. India is expected to have around 6 trillion cubic metres (tcm) of recoverable shale gas (compared to 1.3 tcm of conventional natural gas). However, production costs in India will be significantly high due to the advanced technological requirements and relatively unknown terrain.

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