JOIN USInternational crude prices hit an 11-year low at $36.05 a barrel last week, and the average for the financial year is likely to be around $50, a steep fall from $85 the previous year. The decline has been steady and the prices are predicted to fall as low as $20, going forward, which was unimaginable a few months ago. The steady rise till a year ago was partly the result of some speculation, but the fall is because of more substantial factors. Global economic growth has slackened and will further slow down in the coming months, reducing the demand for oil. Oil producing countries have decided not to cut production, Iran is preparing to enter the market in a big way after the lifting of sanctions and the US has lifted its 40-year ban on oil exports. There is too much oil sloshing around the world.
The price drop has done much good to India which is a major importer of oil. The import bill has come down and the current account deficit is under control, despite a persistent fall in exports. The fiscal deficit target is likely to be met this year. Over Rs 2 lakh crore has been saved, and the hike in taxes and duties on oil products will boost tax revenues. All this may help the government to meet its higher financial obligations in the coming year. But the price fall is not all a blessing. Lower oil prices will hit the oil producers’ economies and India’s exports too. Exports are already on a sliding path. The export of oil products, which is not inconsiderable, will certainly suffer. The annual remittances from the Gulf countries will be affected. Oil exploration plans are bound to suffer a setback. Low crude prices will make exploration uneconomical and some of ONGC’s expansion plans may have to be shelved. That can be counter-productive in the long term. Even in the medium term, prices can go up again, as oil prices have historically been volatile.
But the low prices and the possibility of their remaining low in the near future give the country an opportunity to address the domestic subsidy issue without much pain. Direct transfer of subsidy to consumers on all petroleum products can be effected and it will prevent mistargetting of subsidy money. India has no strategic oil reserves worth the name. This is the best time to build up such reserves. Since many oil assets abroad will go cheap, acquisitions can also be considered.