Crude at $30: What does it mean for India?

Krishnanand Tripathi

India-Energy-Security-03Crude tumbled below $30 a barrel on Tuesday, its lowest level in 12 years. The benchmark Brent Crude and West Texas Intermediate briefly traded below $30 a barrel on Tuesday. The latest crash in crude prices is driven by three factors – a supply glut that resulted in a global inventory pile up, slowing of the world’s second largest economy China & consequent fall in demand and finally oil producers’ decision not to cut output.

All the major producers, OPEC countries, Russia, Iran and US Shale companies have refused to cut down production to defend their market share.

As a result, global crude prices have come down by more than two thirds since the summer of 2014 when the oil prices had been hovering over $100 a barrel. Crude prices have fallen by around a fifth in first 12 days of this year and have declined by a third in 2015.

Leading global financial firms like Goldman Sachs and Morgan Stanley have predicted that the oil prices may touch $20 a barrel.

International oil prices are expected to remain subdued in near to medium term as the US inventories are over 100 million barrel above their five year average.

US Government on Tuesday forecast that global reserves would only start to decline in the third quarter of 2017, after consistently rising for four years.

US government’s Energy Information Administration (EIA) said in its first forecast for 2017 that Brent crude should average $40 a barrel in 2016 and $50 a barrel in 2017, with U.S. prices averaging about $2 per barrel lower than Brent in 2016 and $3 lower in 2017.

Another leading global bank Standard & Chartered turned even more bearish as it predicted a new low of $10 a barrel for crude prices last seen in 1998 during the Asian financial crisis.

On Tuesday, US crude oil futures were trading around $40 a barrel for 2016, $50 a barrel through 2020.

The situation is unprecedented and hugely beneficial for oil importing countries like India as the country imports nearly 80% of its oil and gas requirement.

Chinese firms are already lapping up cheap oil despite slowdown in the economy, building the country’s commercial and strategic reserves. It was clearly reflected in the official data released Tuesday. China imported 33.19 million tonne of Oil in December, an increase of over 9% compared to the import of crude in December 2014.

China imported 8.8% more oil in 2015 in comparison with a year earlier despite its GDP growth expected to come below 7% in 2015 from a moderately high GDP growth of 7.3% a year earlier.

India benefitted in last 18 months from the fall in crude prices. The government has increased excise duty on petrol and diesel seven times since November 2014. It is expected to fetch additional revenues of Rs 30,000 crore in the current financial year. Due to this Indian consumers continued to pay the pre-fall prices.

Between November 1, 2014 and December 16, 2016, the retail price of Petrol was revised 21 times but the effective cut is only Rs. 4.86 per litre in Delhi. Diesel price was also revised 21 times during the period, but the effective cut is only Rs. 8.32 per litre.

The government collected Rs 99,184 crore in excise duty on petroleum products in 2014-15. It had a windfall gain of Rs 33,042 crore in the first quarter of the current fiscal.

India’s current account deficit that had touched a record high of $87.8 billion in 2012-13, 4.8% of the country’s gross domestic product has come down to just 1.8% in the first six months of this fiscal. The government has set a target of bringing it down to 1.2% of GDP in this year’s budget.