The recent fall in crude oil prices is exactly the type of good news that the Indian economy needs badly today. However, it may have come a little too late, as the simultaneous fall in rupee is limiting the economic gains. Nevertheless, the trend is certainly something to cheer about, but will need supportive policy action to bring about a real change.
Crude oil prices had steadily climbed earlier in 2012 notwithstanding the growing concerns over European economic crisis due to tensions over Iran as US and Europe proceeded with sanctions. These fears receded with Iran returning to the negotiating table with the UN Security Council over its nuclear ambitions on April 14. These talks, which resumed on May 23, in Baghdad, have given hopes that the dispute over Iran’s nuclear programme could be resolved through discussions.
“There have been a few other factors combining to exert a downward pressure on oil prices in recent days. These include disappointing US employment data, which renewed concerns over the health of the economic recovery of the world’s largest consumer of oil, and euro zone joblessness rising to a 5-year high in April. While all these portend further weakening in oil demand in the developed world, supply-side indications are also adding a bearish pressure,” mentioned Vandana Hari, Asia editorial director, Platts — a leading provider of energy information.
Even the International Energy Agency feels convinced that the tide has turned. According to IEA, the global crude oil production stood at 91 mbpd in April2012, with OPEC production rising to 31.85 mbpd and non-OPEC production rising to 52.9 mbpd from last month.
For the Indian economy, with its deteriorating public finances and rising oil subsidies, this is a big opportunity to set its shop straight. The oil industry’s under-recoveries that stood at . 563 crore per day in the first half of April 2012, have eased to . 509 crore per day for the second half of May 2012. This should fall further, particularly if the government can push through some price hikes. The weakening rupee could, however, prove a spoilsport. The Indian basket of crude oil averaged around $111.15 per barrel in the first half of May 2012, which was 10.4% below the average $124.03 in the first half of March 2012. However, as the rupee weakened substantially in May, the fall in crude oil cost in rupee terms was just 3.7% in the same period to . 5,957.9 per barrel. If the rupee were to weaken further, it won’t take long for the benefits of falling oil prices to evaporate. In fact, decontrolling the petroleum industry at home to boost public finances could hold a key to provide a long lasting support to the rupee’s value in the international market.
Crude oil prices had steadily climbed earlier in 2012 notwithstanding the growing concerns over European economic crisis due to tensions over Iran as US and Europe proceeded with sanctions. These fears receded with Iran returning to the negotiating table with the UN Security Council over its nuclear ambitions on April 14. These talks, which resumed on May 23, in Baghdad, have given hopes that the dispute over Iran’s nuclear programme could be resolved through discussions.
“There have been a few other factors combining to exert a downward pressure on oil prices in recent days. These include disappointing US employment data, which renewed concerns over the health of the economic recovery of the world’s largest consumer of oil, and euro zone joblessness rising to a 5-year high in April. While all these portend further weakening in oil demand in the developed world, supply-side indications are also adding a bearish pressure,” mentioned Vandana Hari, Asia editorial director, Platts — a leading provider of energy information.
Even the International Energy Agency feels convinced that the tide has turned. According to IEA, the global crude oil production stood at 91 mbpd in April2012, with OPEC production rising to 31.85 mbpd and non-OPEC production rising to 52.9 mbpd from last month.
For the Indian economy, with its deteriorating public finances and rising oil subsidies, this is a big opportunity to set its shop straight. The oil industry’s under-recoveries that stood at . 563 crore per day in the first half of April 2012, have eased to . 509 crore per day for the second half of May 2012. This should fall further, particularly if the government can push through some price hikes. The weakening rupee could, however, prove a spoilsport. The Indian basket of crude oil averaged around $111.15 per barrel in the first half of May 2012, which was 10.4% below the average $124.03 in the first half of March 2012. However, as the rupee weakened substantially in May, the fall in crude oil cost in rupee terms was just 3.7% in the same period to . 5,957.9 per barrel. If the rupee were to weaken further, it won’t take long for the benefits of falling oil prices to evaporate. In fact, decontrolling the petroleum industry at home to boost public finances could hold a key to provide a long lasting support to the rupee’s value in the international market.
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