How Global Oil price fell and what are the impacts ? Know every thing related to it .

• Recently the world has witnessed a slump in the oil prices to the tune of 36% decline in the past six weeks.

Context

• In the period between October 3 and November 21, the price of brent crude, a global benchmark for oil prices, has declined by 36% from $86.29 to $63.3 per barrel.
• The recent slump comes after high oil prices in the recent years through 2017 and 2018 hovering around $80 per barrel.
• Further the slump in oil prices comes as a surprise with global forecasts of oil prices predicting a $74 per barrel through 2018 and 2019.

 Behaviour of price 

• Oil being a commodity is subject to price fluctuations primarily on two factors namely supply and demand.
• If the supply is more and demand is less the price will fall and vice versa.

Global major suppliers

Globally major suppliers of oil include:

• OPEC (The Organization of the Petroleum Exporting Countries) who are responsible for about 40 percent of the world’s oil supply and 60 percent of the oil traded globally.
• OPEC includes 15 countries with major ones including Saudi Arabia, Iran, Iraq, UAE, and Venezuela to name a few.
• While Saudi Arabia is the world’s largest supplier with nearly 10% of the global share, Iran is the 3rdlargest supplier of oil in OPEC.
• Major Non-OPEC producer and suppliers of oil include USA and Russia.

Global major consumers 

• USA is the largest oil consumer in the world followed by China, Japan, India and Russia.
• While USA is the largest consumer, China became the world’s largest importer of oil recently in 2017.
• In 4th position India with a demand of 4.7 million barrels per day also imports 80% of its crude oil requirement.
• According International Energy Agency China and India together contribute to close to 50% of the global oil demand.

What are the reasons of recent slump in oil price?

Supply-side reasons

• Waiver to Sanctions on Iran
  • USA after withdrawing from Joint Comprehensive Plan of Action popularly known as Nuclear Deal of 2015 had imposed sanctions on Iran.
  • This move was expected to severely hit the oil supply as Iran’s economy is heavily dependent on oil exports.
  • However the US administration has granted waivers from sanctions to 7 countries including Iran’s largest customers Japan, China and India.
  • This has allowed oil supply from Iran keeping the prices in check.
• Increase in supply from Saudi Arabia
  • The major reason for high oil prices through 2017 and 2018 is that the OPEC countries led by Saudi Arabia had been holding back on the production of oil
  • This had substantially affected the global oil supply keeping the prices higher.
  • Now Saudi Arabia has eased on the production of oil and thereby increasing the supply of oil leading to reduction in the global oil price.
• Increase in supply from USA
  • Among the major non-OPEC suppliers of oil USA also contributes to global oil supply by producing Shale.
  • The production of shale has been more than expected and thereby filling the supply gaps in global oil supply.

Demand-side reasons

• China which is the largest importer of global oil has a seen a fall in demand as a result of trade war with the USA.
• This has severely hit the global oil demand thereby reducing the price.

How it Impact on India

• Lower import bill
  • With more than 80% of the crude oil requirement coming from imports, India’s import bill will significantly come down.
  • With crude oil being the single largest import that India makes, a $1 decrease in price of crude means over $1.2 billion decrease in our import bill. 
• Current account balance
  • A fall in oil price would drive down the value of its imports as seen above.
  • This helps narrow India's current account deficit - the amount India owes to the world in foreign currency.
  • According to estimates, a fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion which is nearly 0.43% of the GDP.
• Inflation
  • A slump in the oil price significantly reduces the prices of goods in the economy due to reduced cost of transportation of goods and services.
  • According to estimates every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%.
• Appreciating rupee
  • The value of rupee depends significantly on the current account deficit.
  • A high deficit means the country has to sell rupees and buy dollars to pay its bills.
  • If the demand for US dollar increases in India, we end up paying ‘more’ rupee to get the same amount of dollars. In such situations the value of rupee is said have depreciated.
  • Thus when CAD is reduced our demand for dollars is reduced in which case the value of rupee is said have appreciated.