Macro Moves

Crude Oil Price : Why Prices are Falling

Created on 13 Mar 2020

Wraps up in 3 Min

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The 3 basic needs of humankind that include food, shelter and clothes have evolved over time and now, few more things have been added to this list like electricity, internet etc. This is at an individual level. However, if you consider an entire nation then fulfilling these needs is almost impossible without one thing and that’s crude oil. Crude oil doesn’t affect our life directly but it’s an indirect basic need of our life.

This basic need was controlled by a global cartel called OPEC (Organization of Petroleum Exporting Countries) along with Russia & US till now. Whenever a government was questioned about rising oil prices, it blamed the international oil prices. But, the nation never questioned that why can’t these prices be controlled at an international level? But now the things have changed with Saudi Arabia breaking the cartel and engaging in a price war.

How Has One Player Shaken the World?

If one player breaks the cartel, entire control strategy goes for a toss. At least that’s what the Saudi incident shows us. Since last two days news channels have been buzzing with the news of Madhya Pradesh MLA Jyotiraditya Scindia resigning from Congress and joining BJP. Madhya Pradesh is a state that is ruled by Congress at present and with Scindia resigning, the government might not sustain (because 20 others have resigned with Scindia).

This example shows that if somebody (important) breaks the cartel, then it might even lead to dethroning of the unsaid ruler. You see, Saudi Aramco which is the largest oil producer in the world has not only broken the cartel but, reduced its prices to a 20 year low! This has hurt Brent Oil (Russia) the most because Saudi has also announced an increase in production. Some analysts say that price per barrel which is currently around $35 will reach $20.

Advantage for India-

The price war has affected the oil exporting countries drastically and this is supposed to write a new chapter in the global politics. Now, since India imports its 80% oil for fulfilling its requirement, it’s definitely a plus for India. This can be understood by the fact that when the per barrel price crossed $100, India had to pay an extra whopping $12 billion which surely affected the economy directly. Now that the prices have been reduced by almost 30%, it is being expected that the oil bill for India would be reduced by almost a billion dollars per year.

But, before you get too happy and start hallucinating petrol prices at Rs. 50 or so per litre, wait. In the last week, petrol prices registered a constant fall but this was limited to few paisa every day. Now that per barrel prices of crude oil have been reduced so much, it’s just a valid question that when would we see the effect on our pockets? So, the answer is that there’s a 27-day cycle that occurs between import and final product that’s ready for consumption. But here’s a catch too. Coronavirus.

Connection Between Coronavirus & Crude Oil

We all know that oil is biggest source of revenue for the government. So, as the crude oil prices are going down substantially, the government might not pass on all the benefit to the consumer because of the pandemic. Government has no other option but to provide a relief package to the fraternity affected by Coronavirus. The antidote is still not available and hence it will be more financially burdensome for the government if they don’t keep funds in backup.

Is this it? No. With the elections coming up in some states, it’s also possible that the government might reduce rates just before them to reap benefits. Also, it’s uncertain as to how long the price war would continue so, we might even see the crude oil prices shooting up in near future. What exactly would happen? For that, we’ll have to just wait and watch.

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Deb P Samaddar

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If people could be named after idioms, Deb would be called "I'm all ears." His brain is a storehouse, ever overflowing with derelict information. So, while most things he talks about are as useless as occasion-less greeting cards, everything he writes has the potential of bagging you multiple diplomas!

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