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The fall in oil prices could benefit the Indian economy

India should be thankful for more than the obvious gains like a reduced trade deficit, a more stable exchange rate, more fiscal space, lower inflation and reduced interest rates

editorials Updated: Jun 13, 2019 18:13 IST
Hindustan Times
A technician opens a pressure gas valve inside the Oil and Natural Gas Corp (ONGC) group gathering station on the outskirts of Ahmedabad, 2012. (REUTERS)

Amid a bevy of negative economic news, New Delhi can take comfort in the present slump in oil prices. In the first quarter of this year, oil prices rose over a third. There was talk of $100-a-barrel and growth downgrades for importers like India. Events seemed to only strengthen the case for a price spike: mismanagement by Venezuela and sanctions against Iran cut supply by over two million barrels a year, the Organisation of Petroleum Exporting Nations held to earlier production curbs, and the proxy war between Tehran and Riyadh escalated. Instead, global oil prices have fallen to the low 60s and one crude variety, West Texas Intermediate, hit $52 a barrel. With some analysts speaking of oil prices softening all the way into 2020, India could be a huge beneficiary given its problematic standing as the world’s fastest growing importer of oil.

The reason oil prices are in free fall is not supply, but demand. The assumption that the United States, China and India – the world’s three biggest oil consumers – would keep burning ever increasing amounts has proven false. US oil consumption has been falling while China’s economy is slowing down rapidly. India’s growth in the coming year is likely to be less than robust. The US’s multiple trade wars are putting brakes on growth worldwide. The most obvious evidence of this mismatch between supply and demand, the fundamental driver of global oil prices, is that overall US oil inventories are at their highest level since 2017. Almost every major energy analyst is predicting oil overproduction for months to come.

India should be thankful for more than the obvious gains like a reduced trade deficit, a more stable exchange rate, more fiscal space, lower inflation and reduced interest rates. But a more useful fallout may be the end of the oil fix between Saudi Arabia and Russia which had artificially boosted prices over the past year. These two countries had agreed to cut oil production with the hope of boosting prices into the $80-90 a barrel range. But this has not worked out as planned and many oil producers now want to cut loose. Moscow has signalled it can live with oil in the $50 to 60 range. Riyadh prefers something closer to $ 80 to 90. The two sides have begun to publicly spar on this issue and the end of this cartel within a cartel arrangement could be the best reassurance for India that oil will remain affordable. Russia has already warned of a new normal of $40 a barrel if the market continues on its present path.

First Published: Jun 13, 2019 18:13 IST