Mumbai, March 19, 2018 : Exim Bank has recently published a study entitled ‘Oil Price and International Trade in Petroleum Crude & Products: An Indian Perspective’. The Study, inter alia, has analyzed the trend in oil prices, examining the causes and implications of the price variations, and has assessed the impact on India’s international trade of crude and petroleum products.
The Study notes that price fluctuations in the commodity markets, especially in the short run, are driven by market sentiment and expectations. On the other hand, the long run trend in prices mostly tend to be driven by underlying demand and supply conditions. According to the Study, the steep price decline in crude oil after June 2014, was a blend of both these factors. The changes in demand and supply, while noticeable, were not unusually large. However, certain other developments like the significant shift in OPEC’s objectives, receding geopolitical risks and the US dollar appreciation brewed the recipe for the downfall in oil prices.
The Study also highlights that unconventional sources of oil production like the Shale oil boom in the USA and oil sands in Canada along with the production of biofuels had substantially increased the supply of oil in the global market. Better-than-expected output in OPEC nations and their decision in November 2014 not to curtail oil production only added to the supply surplus. At the same time, weaker-than-expected demand from Europe and Asia added to weakening of oil price.
At the global level, the moderation in oil prices had an overall positive impact, given the fact that some of the largest economies in the world are major oil importers. The US ranks as the largest importer of crude petroleum and products. Although the US also features in the exporters list, it still is a net importer of these products. China is a close second and India ranks fourth, behind Japan. Other major importers include South Korea and Germany. The Study notes that the shift in real income from net oil exporting countries to net oil importing countries as a result of the price decline generally results in a stronger global demand. It is estimated that a 10 percent decrease in oil prices could raise growth in oil importing countries by some 0.1-0.5 percentage points, depending on the share of oil imports in GDP.
India imports a large quantity of crude; and a sharp drop in its prices has benefitted the economy by curbing the current account deficit despite the rise in the quantity of imports. India imported 215 MT of Crude in FY 2017 as compared to 189 MT in FY 2014, a growth of 13.6 percent during this period in volume terms. However, despite the quantity of crude petroleum imports increasing, the value registered a decline – from US$ 144 billion to US$ 71 billion during the same period.
The Study observes that due to the falling oil prices, India’s macro-economic indicators such as inflation, trade balance and current account deficit improved. Had oil prices remained at 2013-14 levels, India’s trade deficit would have widened by another US$ 82 billion in FY 2017. A decline in crude oil price also helped the government to manage its finances better as it translated into lower subsidies on petroleum products (LPG and kerosene), thereby resulting in lower fiscal deficit. The Study notes that the oil price decline helped the government save an estimated ` 31,175 crore in FY 2016 in petroleum subsidies.
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