Given the current slowdown in economic activities across the globe and steep plummets in oil prices of WTI and Brent, what will be its implications on the economic trajectory of India, an oil-importing country, and to what extent?
A: As per analysts, the plummeting crude prices are expected to reduce import bills for India to the tune of USD 40 billion (assuming a demand reduction of 30% and crude prices at USD 30/barrel). This shall help in correcting trade imbalance. However, crude import bills to GDP ratio has come down significantly in the last 5-7 years; hence any major impact is not expected due to the price fall.
How will the price drop in oil affect economic factors like inflation, unemployment and interest rates? Will it contribute to overcoming recession in the Indian economy?
A: A drop in crude prices is not expected to affect the CPI inflation, since the government may raise taxes on petrol and diesel to compensate for the shortfall in GST, VST and Excise duty from other sources. Industry and people will spend on fuel only for genuine necessities. Discretionary spends will be witnessed rarely. Hence, analysts do not expect it to contribute in overcoming recession in a meaningful way.
Does this situation provide any relief to the pockets of consumers and how?
A: As mentioned above, the drop is not expected to affect CPI inflation drastically. However, the reduction in gas prices to USD 2.39/MMBtu may provide some savings to household consumers connected to Piped Natural Gas (PNG). For the households to benefit, CGD companies will need to be encouraged to pass on the benefits to households. The benefit to airline passengers is also not foreseen as companies will try to make up the losses incurred during the lockdown.
Which sectors of the economy will benefit, and how will it reflect in India’s economic condition?
A: Once the lockdown is over, and industries start operating again, fertiliser industry and gas power plants which use gas as a feedstock may benefit. The household consumers having PNG and CNG connections will also see some savings. These benefits may, however, prove to be minimal in comparison to the economic challenges we shall face in the coming months.
Can you explain the impact on the downstream oil and gas operations related companies such as refineries, petrochemical plants etc.?
A: Most of the refineries in India are operating at 40-50 per cent of their capacity due to a drop in demand for petroleum products. The storage is also becoming a challenge for refiners. The demand for LPG in India has seen a slight upward swing of 2% in March as compared to February this year. Hence the refiners have the challenge to optimise yields of the end products to keep operations running till the fuel consumption returns.
The advent of US oil in the market and the prevalent tension between OPEC and Russia has exacerbated the supply glut. This detrimental to their economies as well. So, do you see any scope for fruitful negotiations among these nations, any supply cuts?
A: OPEC, Russia and the US have already declared a production cut of 10 million barrels/day. If global consumption reduces by 30 million barrels/day as predicted by some analysts, it will be a challenge for these countries to manage the price level while not excessively cutting the production, since their economies are primarily dependent on oil revenues.
How do you predict the performance of the gulf economies in the future? Do you see any major implications on the political, social and economic situation in the Middle East?
A: If the crude prices remain at the current levels for a long time, the gulf economies may have to dip in their sovereign funds to maintain their budgets. We are already witnessing expenditure cuts across the Middle East.
Can we draw any inference from the past global events like the economic crisis of 2007-08 and their impact of the oil markets to understand the consequences of the present situation?
A: The crisis of 2007-08 was different as we did not witness a severe reduction in global crude demand. This may force several US shale companies into bankruptcy if the crude prices do not rebound sharply. We may also see some behavioural changes like work from home, which may lead to permanent loss of demand.
Can you explain the concept of petrodollars and its significance? How will the supply glut affect petrodollars, and how will this affect global investments?
A: The petrodollar is a US dollar paid to OPEC countries in exchange for oil. The currency of Saudi Arabia and some other OPEC countries is linked to the US Dollar. These oil-exporting nations receive US Dollars for their exports. That makes their revenues dependent on the USD’s value. If the value of USD depreciates, so does OPEC government’s revenue.
The production cuts due to supply glut will generate fewer petrodollars for these economies. However, since the dollar itself is stable, there may not be much impact on existing oil contracts.
