A. Harikumar
Oil prices, which have been staying above $ 90 per barrel for quite some time rallied further on Monday (Feb 21) as Russia-Ukraine stand-off worsened stoking fears of upsetting the budget projections of many countries including India, which are net oil importers.
Prices surged after Russian president Vladimir Putin’s announcement recognising independence of two breakaway regions of eastern Ukraine. While the price of Brent, a type of oil considered as benchmark internationally, jumped 2.46 % to touch $ 97.93 per barrrel, the US crude benchmark WTI surged to 94.76 a barrel. Both were traded at their seven-year-high since 2014.
India’s budget for 2022-23 introduced by the finance minister Nirmala Sitaraman recently had estimated oil price to be $ 70-75 per barrel. Against the present backdrop of spike in crude oil price, this expectation is unlikely to be true at least in the near, mid-terms because of a multitude of factors.
Ukraine crisis or other factors?
Is the Ukraine crisis the sole reason for the present spike in oil price? Not at all. There are many other factors supporting the upswing in prices. It is the failure of the supply to meet increasing demands the main reason for the present oil price rise. According to International Energy Agency (IEA) while global consumption was back to about 98% of pre-pandemic levels, only 95% of supply had been restored.
Meanwhile, IEA data has also pointed out that the vast oil surplus accumulated during the days of the pandemic has been wiped out already, with inventories in rich industrialized countries at a seven-year low in November. Moreover, the IEA expects global demand to expand by 3.2 million barrels per day (bpd) this year, reaching an all-time record. So demand is likely to be high in the coming days and if the supply doesn’t increase prices may also remain high.
Impact on India’s economy
Sky-rocketing crude oil prices are definitely going to increase the fiscal deficit of India steeply. At the present level of oil prices, it would be a herculean task for India to contain the fiscal deficit at 6.4 percent of the GDP as targeted in the budget 2022-23. Being the second largest importer of Crude oil in the world after China, India imports almost 83 percent of the crude oil it needs, and around 45 per cent of its total LNG consumption.
Sections of economists point out that every10 dollar rise in oil will raise inflation by 49 basis points and increase the fiscal deficit by 43 basis points if government decides to absorb the shock. India had been greatly benefited by the fall in oil prices during the last few years when it reduced its import bill by several billions of dollars.
At the same time governor of the Reserve Ban of India (RBI) Sakthikanta Das has been quoted by the media expressing confidence in the government’s ability to face exigencies. The government has taken into account all possibilities regarding oil price, he said.
Future scenario
Experts from the oil industry say prices may even go up to $ 120 a barrel in the near to medium-term. There are experts who predict oil to cross $ 150 / a barrel.
However an oil apocalypse is very unlikely to happen as high oil prices will encourage the oil industry to make new capital expenditures and increase the output. Oil companies cannot withhold their development for long to boost up the price and they would like to make hay while the sun shines.
In the United States, the shale industry has already started adding new rigs. The rig count is an indicator of future production. At present the rig count has risen to 516, its highest since April 2020, If the oil price rise to unreasonable levels like $ 150 per barrel, then shale industry won’t be able to restrain itself from increasing production. It could also speed up investment in alternate energy and will cause a deep slump in oil prices in the long term. Even the OPEC may not want that. So ultimately it is in the interest of everyone that the oil is priced reasonably to sustain the demand. In the medium term a price of $ 110 could happen, but $ 150 a barrel will eventually backfire.
