By Nantoo Banerjee
After the new wave of coronaviruses in comes the oil shock to India’s fragile economy. Going by government estimates, India’s GDP had shrunk by eight percent in 2020-21 as against a four percent growth in the previous fiscal. While the current year’s economic growth picture remains unclear at this point of time, rising global crude oil prices and falling Indian rupee (INR) are posing a concern. Crude oil prices are rising in anticipation of an economic recovery in big markets such as the US, China, India, Japan, South Korea, the Netherlands, Germany and Spain. China is the world’s largest oil importer, followed by the US and India.
The three countries together account for nearly 45 per cent of the overall crude oil import. The US Energy Information Administration (EIA) had earlier indicated an average of $49/b for Brent in 2021. This is around 14 per cent higher than the average for the fourth quarter of 2020. EIA expects that while inventories will remain high, it is anticipated that they will decline because of the rising global oil demand and lower than expected increase in OPEC+ oil supply. EIA forecasts Brent prices to average $47/b in the first quarter of 2021 and will rise to an average of $50/b by the fourth quarter. Unfortunately, the global oil market seems to be behaving differently.
Oil futures are much higher. They are now range-bound near $60 a barrel, a level around which they have gyrated for almost four weeks. The oil market is trying to shake off near-term demand concerns regarding the resurgence of the virus as well as the easing in the global reflation trade. However, the Indian economy is beset with fast rising Covid-19 infections, spike in inflation, falling factory production and shrinking value of INR. Rising crude oil prices are bound to hit further India’s economic growth prospects, this year. Only last month, oil briefly rallied toward $70 a barrel after OPEC+ chose not to relax supply curbs even as the global economy pulls out of its pandemic-driven slump. It confounded widespread expectations that the group would loosen the taps.
Suddenly, major international banks are hurrying up to upgrade their crude price forecasts. Saudi Arabia said that it would maintain its one million barrel-a-day voluntary production cut. Now, reported shelling of Saudi Arabian Aramco’s oil facilities by Yemeni Houthis at Jubail and Jeddah comes as a further shock, threatening to disturb a reasonable oil price stability during the rest of the year. Yemen’s Iran-aligned Houthis claimed it had fired 17 drones and two ballistic missiles at targets in Saudi Arabia, though there was no immediate confirmation from Saudi officials. The slow rate of Covid vaccinations in Europe and India and anticipation of additional supply of oil from Iran in the coming months partly capped price gains.
High global crude oil prices coupled with India’s punishing domestic system of levies on petro products by both the centre and states are bound to impact the economic recovery process, this year. Nearly, 86 per cent of India’s annual crude oil requirement are met through imports. In 2019-20, India imported as much as 270 million tonnes of oil, recoding a four percent increase over the previous year’s level. The import cost was US$102.3 billion. India’s import of LNG spiked 17 percent to 33,680 Million Standard Cubic Meter (MMSCM). India imports around 1.5 billion barrels of crude oil each year.
The rising crude oil prices would raise India’s overall expenditure and lead to higher fiscal deficit. The lower crude oil prices were a major contributing factor in the reduction of India’s fiscal deficits between 2014 and 2016. Earlier this month, the Indian currency fell 1.5 per cent to Rs. 74.55 against the US$, witnessing the biggest one-day drop since August 2019. On April 15, it dropped further to over Rs. 75 for a dollar. This is igniting overall price inflation as the costs of both production and transportation are going up. All oil transactions are paid in US dollars. Most oil-exporting countries peg their currencies to US dollar. As a result, a 25 percent rise in the dollar offsets a 25 per cent drop in oil prices. The global economic uncertainty is keeping the US dollar strong.
The EIA oil price forecast 2025-50, done early in the coronavirus pandemic last year, says by 2030, world demand is seen driving Brent prices to $89/b. By 2040, prices are projected to be $132/b. By then, cheap oil sources may be exhausted, making it more expensive to extract oil. By 2050, oil prices will be $185/b. EIA assumes that demand for petroleum flattens out as utilities rely more on natural gas and renewable energy. It also assumes the global economy grows around two percent annually on average, while energy consumption decreases by 0.4 percent a year. There are situations that could put oil prices even higher at $200/b. EIA forecasts Brent oil prices at $185/b in 2050 if the cost of oil production drops and it crowds out competing energy sources. But economic conditions could drive the price even higher. Such a price spurt over the next three decades looks rather frightening for India.
Import reliant India must chalk out programmes to drastically cut petroleum consumption without any further delay. Within a year after his swearing in as India’s prime minister, Narendra Modi had said that the country must aim to reduce its dependence on oil imports by 50 per cent over a 15-year period. Modi said India’s dependence on imports for 77 per cent of its “energy” requirement should decline 10 per cent by 2022, and 50 per cent by 2030. However, in reality, India’s oil imports have been going up steadily until last year when Covid-19 brought down its economy and consumption. It is a matter of grave concern that the government is yet to formulate a programme that will gradually reduce domestic oil consumption and import. (IPA Service)