Are oil prices sinking? What does this mean for the Indian economy?

Are Oil Prices Dropping?

Global oil prices appear to be sinking. Last year January they sank to a 6-year low. While prices have risen somewhat from that, they are not at a great high.

Although many traders believe that OPEC will rally to push up prices, given their history this doesn't seem likely. Even when oil producing countries do cooperate to try to push up oil prices, the members do not adhere to their quotas.

In any case, Saudi Arabia (who is crucial if they are to increase prices) seems to be more focused on defending their market share in the global oil market.

The most likely event is that there will be a back-and-forth on oil prices, with a net sink but not too far. This is the view held by experts like Morgan Stanley.

How Will India Be Affected?

India as a net oil importer has benefited over the past year or so from falling oil prices. Since India imports over 70 percent of its crude oil requirements, this is a significant factor.

However, things are not that straightforward, and there may be losses and falls in the trading markets due to falling oil prices.

  1. Since India imports, falling prices have helped reduce import costs of oil. Lower Current Account Deficit (due to lower import bill) and strong foreign capital inflows, has helped India build up its forex reserves. This makes for a stronger Indian market.
  2. India subsidizes petroleum products heavily. With lower oil prices, subsidies on LPG and other oil products cost less.
  3. Oil prices also affect the economy as the price of everything, especially transportation depends on oil. Even prices of goods go up as their freight charges will also go up. So lower oil prices mean lower prices on everything. The estimate according to Moneycontrol is that each $10 per barrel drop in crude oil price aids in diminishing retail inflation by 0.2% and wholesale price inflation by 0.5%.


What's the Verdict?

Although sinking oil prices can reduce India's import and subsidy costs, it will also reduce India's export earnings.

The marginal improvements in the economy due to lower oil prices are not longstanding. There is still time to take advantage of lower oil prices and their effect on securities and commodities in the Indian market, but lower global oil prices might lead to trouble in global markets.

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