One of the top stories of 2014 was the dramatic fall in the price of oil, with Brent crude trading at around $50 per barrel, a fraction of the $115-$118 per barrel price it usually fetched till early last year. This crash has significantly helped India, as also other large oil importers, providing relief from high inflation numbers.
The price of crude oil is crucial to the Indian economy, considering that the country imports nearly 80% of its oil requirements and more than 50% of its natural gas needs. Near the end of 2013, India imported about 2.6 million barrels per day at a cost fluctuating around $110-$115 per barrel.
In politics, unsurprisingly then, cheaper fuel is invariably a big draw.
Political parties miss no opportunity, however factually inaccurate, to take credit for lower fuel prices. Imitating the Congress-led United Progressive Alliance government’s conceited habit, Union Minister of State for Environment Prakash Javadekar last week credited the Modi government for bringing down fuel prices.
Flooding the market
In reality, the current global downturn in oil prices can largely be traced to the policies, insecurities and internal tussles of the cartel-like Organization of Petroleum Exporting Countries or OPEC. Headquartered in Vienna in Austria and run by the heavyweights of global oil production, OPEC has been the single most important entity for manoeuvring global oil prices, until now.
As the price of oil began spiralling down in May 2014 and global economic growth, particularly in China, remained sluggish, a contest broke out within the OPEC to keep oil production at peak. Members and foes, such as Saudi Arabia and Iran, fought for market share with each other by refusing to cut their production, as a result flooding the market with more oil than needed.
Alongside this, the cartel locked horns with lesser known, but fast gaining, non-OPEC producers of oil.
Challenging OPEC’s dominance today are the US’s shale oil and gas reserves, Canada’s uncelebrated oil sands, Russia’s production capacity, and newer players like Mexico. The US, which was Saudi Arabia’s top oil market, is now producing enough oil and gas on its own to serve its domestic needs. Even if the US wants to increase imports, it prefers to do so from neighbouring Canada.
Scuttling competition
The US shale revolution has not been accepted kindly in Saudi Arabia. In fact, Riyadh is looking to keep oil prices unsustainably low in a bid to damage America’s shale prospects.
Most of the new oil finds today are in challenging geological environments and require immense financial investments. Oil prices at around $50-$55 per barrel make exploration and production of new oil fields unviable. It is estimated that Saudi Arabia’s bid to scuttle competition may cause it a financial hit of around $500 billion in 2015. Yet, it is said to persist.
Meanwhile, Russia, a non-OPEC oil producer whose economy too is balanced on oil and gas revenues, is feeling the pinch of the prolonged low oil prices. The Russian economy last month suffered its first contraction since the global crisis began, and western sanctions on Moscow over Ukraine is plunging the country deeper into economic trouble. Given all this, Moscow will also not cut production in the near future to keep its leverage afloat.
Large subsidies
Finance Minister Arun Jaitley recently said that since oil prices are now synced with the markets, the government now rules domestic pricing (along with state taxation, of course). However, India still heavily subsidises oil. According to analysts, subsidies on petroleum products in 2005-'06 stood at Rs 2,930 crore. By the time of the 2014-'15 budget, this figure exploded to Rs 65,000 crore.
Even though the prices of petroleum product have adjusted according to markets, the Indian government has kept raising the excise duty on them. This has a two-fold advantage. First, the tax revenue from petroleum products increases (or stays stable, at the very least), and secondly, prices do not go too low, which would be difficult to explain when crude prices inevitably rises to over $100 per barrel.
The price of crude oil is crucial to the Indian economy, considering that the country imports nearly 80% of its oil requirements and more than 50% of its natural gas needs. Near the end of 2013, India imported about 2.6 million barrels per day at a cost fluctuating around $110-$115 per barrel.
In politics, unsurprisingly then, cheaper fuel is invariably a big draw.
Political parties miss no opportunity, however factually inaccurate, to take credit for lower fuel prices. Imitating the Congress-led United Progressive Alliance government’s conceited habit, Union Minister of State for Environment Prakash Javadekar last week credited the Modi government for bringing down fuel prices.
Flooding the market
In reality, the current global downturn in oil prices can largely be traced to the policies, insecurities and internal tussles of the cartel-like Organization of Petroleum Exporting Countries or OPEC. Headquartered in Vienna in Austria and run by the heavyweights of global oil production, OPEC has been the single most important entity for manoeuvring global oil prices, until now.
As the price of oil began spiralling down in May 2014 and global economic growth, particularly in China, remained sluggish, a contest broke out within the OPEC to keep oil production at peak. Members and foes, such as Saudi Arabia and Iran, fought for market share with each other by refusing to cut their production, as a result flooding the market with more oil than needed.
Alongside this, the cartel locked horns with lesser known, but fast gaining, non-OPEC producers of oil.
Challenging OPEC’s dominance today are the US’s shale oil and gas reserves, Canada’s uncelebrated oil sands, Russia’s production capacity, and newer players like Mexico. The US, which was Saudi Arabia’s top oil market, is now producing enough oil and gas on its own to serve its domestic needs. Even if the US wants to increase imports, it prefers to do so from neighbouring Canada.
Scuttling competition
The US shale revolution has not been accepted kindly in Saudi Arabia. In fact, Riyadh is looking to keep oil prices unsustainably low in a bid to damage America’s shale prospects.
Most of the new oil finds today are in challenging geological environments and require immense financial investments. Oil prices at around $50-$55 per barrel make exploration and production of new oil fields unviable. It is estimated that Saudi Arabia’s bid to scuttle competition may cause it a financial hit of around $500 billion in 2015. Yet, it is said to persist.
Meanwhile, Russia, a non-OPEC oil producer whose economy too is balanced on oil and gas revenues, is feeling the pinch of the prolonged low oil prices. The Russian economy last month suffered its first contraction since the global crisis began, and western sanctions on Moscow over Ukraine is plunging the country deeper into economic trouble. Given all this, Moscow will also not cut production in the near future to keep its leverage afloat.
Large subsidies
Finance Minister Arun Jaitley recently said that since oil prices are now synced with the markets, the government now rules domestic pricing (along with state taxation, of course). However, India still heavily subsidises oil. According to analysts, subsidies on petroleum products in 2005-'06 stood at Rs 2,930 crore. By the time of the 2014-'15 budget, this figure exploded to Rs 65,000 crore.
Even though the prices of petroleum product have adjusted according to markets, the Indian government has kept raising the excise duty on them. This has a two-fold advantage. First, the tax revenue from petroleum products increases (or stays stable, at the very least), and secondly, prices do not go too low, which would be difficult to explain when crude prices inevitably rises to over $100 per barrel.
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