Forces effecting crude oil price rise; What happens to India?

According to Finance Minister, Arun Jailtey, current price highs won't harm India much but higher rates will torment the economy resulting in inflationary pressure.

Prices of oil have increased from $38 per barrel in April 2016 to $50 per barrel in June 2016, growing by 26%. Photo : Reuters

Crude oil is currently facing a price war.

Prices of oil have increased from $38 per barrel in April 2016 to $50 per barrel in June 2016, growing by 26%. Why is there such a sudden change, which are the forces pushing the oil prices.

In April, oil-giant API recorded a significant decline in deliveries to oil storage facilities, which was later echoed by the Energy Information Administration (EIA). This news was assumed as a sign that the excess of oil available on the market was reducing, which led to an increase in oil prices by 5% in just two days.

Moreover, oil production has dropped nearly 6% in last year alone. At present, fall in oil production is at lowest since 2014—at 8.8 million barrels per day—shrugging around 1, 13,000 barrels per day.

One of the major reason that will harm oil prices is the loose and unclear outlook of Saudi Arabia. The country has liquidated $140 billion of its foreign reserves since the oil price plunged below $50 in 2014 and will be choked of cash within 4 years if the prices continue at current levels or lower.

To avoid the dilemma, Saudi is trying to adapt various reforms such as levying higher taxes on their citizenry to cutting subsidies to balance their budgets.

Other disrupting forces, such as terrorism, strikes, sabotage or lack of maintenance have sharply effected oil prices. In all, "unplanned disruptions" accounted for a loss of about 2.5 million barrels per day.

Impact on India due to rise in crude oil price:

According to Finance Minister, Arun Jaitley, current price highs won't harm India much but higher rates will torment the economy resulting in inflationary pressure.

The country which imports of about 80% of its oil need, will be force to spend around Rs 9,126 crore ($ 1.36 billion) more for every dollar per barrel increase in crude oil prices resulting in trade deficit, while also going through increase in inflation. Such scenario will also cause interest rates to rise as they depend on inflation rate.

The economic growth of 7.6%, which was largely boosted by oil and commodity price, and such rise, will create lackadaisical in the growth.

Revenues of companies using crude oil as raw material will be impacted with this rise. The three prominent sectors taking a fall are aviation, FMCG and companies in the paint business.

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