Why are oil prices such a big deal? Why do they fluctuate so much? Why is oil so precious? Lets find out whats making this situation greasier than we think:
Oil is used for producing energy and electricity and since we depend on this for practically everything an increase or decrease in prices of oil can have adverse effects on many sectors of the economy. This is why oil prices matter a lot. India is one of the largest importers of oil in the world and the slightest change in oil prices directly impacts the country.
Example: A fall in price would drive down the value of its imports. This helps narrow India’s current account deficit – the amount India owes to the world in foreign currency.
If it is popular it’s got to be pricy: If something is popular means its demand is high which means it’s going to be pricy. From 2010 to 2014 oil prices soared above $80 per barrel solely because of increased oil consumption in developing countries. Since India is also a developing country industries are constantly growing to meet the demands of the growing population. And more demand means higher prices. Especially because oil is a limited resource.
But factors that influence these prices, go beyond just demand and supply:
Factor No. 1: Weather conditions
In 2004, a number of devastating hurricanes hit off the southeast coast of the U.S. These hurricanes damaged oil supply facilities and reduced the flow of crude oil supplies to the U.S. Oil production could not meet with consumer needs and caused an increase in oil prices. Even when Hurricane Katrina struck the southern United States in 2005 it affected 19% of the U.S. oil supply, causing oil prices to rise. Any natural disaster or even a rumor of natural disaster can drive up prices.
Factor No. 2: Politics:
Some countries with rich oil reserves have unstable political situation. Political instability can effect supplies and cause price increases.
For e.g. U.S imports oil from Venezuela but in 2002 Venezuela citizens went on a strike appealing for fresh elections. The strike was taken seriously when the oil industries stopped their functioning. This led to oil shortage in U.S and led to increase in oil price.
Factor No. 3: Exchange Rates:
Oil is traded in dollars all over the world. So whenever the dollar value falls oil demand increases and thus oil prices increase. While a rise in dollars value cause the oil demand to fall and that’s why oil prices also fall
Factor No. 4: OPEC countries
One third of the world’s oil is produced by OPEC countries. However after countries like the U.S. discovered unconventional methods to produce oil it posed a threat to OPEC Countries. To save its throne in the oil market they started offering discounts to Asian countries supplying oil at lower prices due to which global oil prices reduced drastically.
Apart from that many OPEC Countries have been facing political instability. For e.g. Iran and Iraq who are members of OPEC have clashes between them and this has also led to drop in oil prices.
Now that you know what influences these oil prices lets see how oil prices impacts India:
#1. Our Current Account Balance:
Since India imports a lot of oil. (1/3rd of our imports are oil). A fall in oil prices will bring down our import value and the money we owe other countries (known as current account deficit) will also fall. According to a report by Livemint a fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion.
#2. The Rupee:
Rupee fluctuates depending on its demand in the currency market and its demand depends greatly on the current account deficit of the country. A high deficit means India has to sell rupees and buy dollars to pay its bills. This reduces rupee’s value. That’s why falling oil prices are good because it reduces our current account deficit.
#2. Rising Prices & Inflation:
Oil is used for transportation, and since goods and services are constantly transported between states, change in oil prices changes the prices of these goods and services. It also affects us all directly as petrol and diesel prices rise or fall with changes in oil prices. As a result, inflation rises.
#4. Petroleum Exports:
Falling oil prices helps imports but on the other hand its bad for exports. India is the sixth largest exporter of petroleum products in the world and thats why any fall in oil prices negatively impacts our exports.
So the next time you here a rise in oil prices has influenced stock markets you know why that happened. If you still have any more questions, comment to let us know.