Transfer gains of oil price fall

Crude prices have entered a new age of price war, with the Organisation of Petroleum Exporting Countries (OPEC) deciding not to cut their production and the prices plummeting in the world market. The prices are now ruling at their five-year low of around $65 a barrel as against over $100 a few months ago, and there are chances that they may slip further.

In the last few months, there has been a glut in the market and it was expected that OPEC might reduce supplies to shore up the prices. But it has gone in for a strategy that aims to address the cause of the glut rather than adopt a tactic to deal with it for the time being. Though most other members wanted to cut supplies, Saudi Arabia prevailed over them to maintain the present levels and risk even further price declines.
The fall in demand for oil, which led the prices to crash, was mainly caused by the shale revolution in the US, which was the world’s top importer and is still the top consumer. With demand from the US declining and fresh supplies from new oil finds elsewhere, OPEC has lost its old pricing power. The present OPEC strategy is to let the prices be decided by market forces and fall to a level where shale gas production  becomes unviable. Fracking is more expensive than extraction of oil by conventional methods.

If the economics of shale production goes below the benchmark set by costs and production falls, buyers may have to go back to traditional suppliers and the prices may again go up. Oil producing countries may have to suffer short-term pain in the hope of regaining their pricing power in the longer term. But it is a risky gamble because all producers do not have the sustaining power like Saudi Arabia. Fall in revenues may upset budgets and even create social unrest in some countries. But OPEC wants to make a fight of it.

The fall in international prices will hugely benefit countries like India which will get better control over their fiscal situation. It will have a cascading impact on most commodity prices and help bring down inflation. It will provide relief to common people who have been weighed down by relentless price rise for years.

But the government has not been ready to transfer much of the gains to the consumers though it has cut petroleum product prices in instalments. The low oil price also provides an opportunity for the government to reform energy policies and put in place new efficiency measures.

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