Tuesday, 8 September 2015

Fall in Oil Prices | Reasons, Impacts, Benefits to India

Prices are down to levels not seen since 2010. There will be a bottom and prices will no doubt push up again, but the fundamentals of demand and supply suggest this may not be for some time

Reasons:
  •  Low demand:
    • Low demand from US - emerging biggest oil producer - shale tech
      • US tight-oil production has continued to rise.
    • China is facing a slowdown
    • European nations are issues of slow growth, high unemplyment - low GDP growth rates
    • Decline in consumer prices - low incentive for production - low industrial demand of oil
    • Shifting focus on renewables
    • Slowdown of gloabl economy
  • High supply:
    • Gulf nations have not decreased their production - with the declining demand 
      • Saudi Arabia is determined to protect its market share and is producing to near full capacity
    • Libya and Iraq have successfully re-entered the export market 
    • with the P5 +1 nuclear agreement, there is a heightened prospect of flows out of Iran.
    • The turmoil in Libya and Syria, the sanctions against Iran, the Islamic State, civil sabotage in Nigeria and the reinforcing thrust of Wall Street traders are just a handful of the “non-fundamental” factors that pushed the price of oil into triple digits for 39 of the 40 months prior to June 2014 -not been enough to push the prices up
Impacts:
  • oil producing countries like Russia, Venezuela, Nigeria, Iran and those in the Gulf are facing burgeoning risks of political and social upheaval. Their social contracts are fraying.  
  • The petroleum companies are also hurting and for the first time in decades - dividend payout less - less investments in oil sector
    • The petroleum market is subject to the economic fundamentals of demand and supply and the non-fundamentals of geopolitics, speculation and currency fluctuations.
  • Threat of deflationary trend seeping in (Kaushik Basu pointed this)

How can India take benefit out of it?
  • Fiscal prudence - meet fiscal targets
  • Control inflation - (since low subsidy burden - less money supply - control inflation)
  • Spur growth - by decreasing taxes also - so that effective rates of oil in the market are also low
  • Fix the macroeconomic fundamentals
  • Assist growth of oil production in India: government must improve the operating environment.  
    • The supply and operating bottlenecks (that is, berthing delays, customs clearances, approval delays, etc ) could, in today’s straitened conditions, make the difference between investor interest and investor indifference. The government has taken a positive step in announcing its intent to auction 60-odd blocks of marginal fields to the private sector.
  • In keeping with the objective to improve the productivity of our currently producing fields, the government should seek technology partnerships to enhance the recovery rates of petroleum from our larger fields, including Mumbai High.
  • the idea “open acreage”, wherein companies can define the areas of exploration interest and offer a work programme at any time has been on the table for some years now. It has been resisted for a variety of reasons, none compelling. Now that it is clear that the conventional exploration licensing model (NELP) will find no takers, this idea should be dusted off and implemented.The government should compel ONGC/OIL to bite this bullet forthwith.
  • Finally, this may be the opportune occasion to build up our strategic reserves.

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