Impact of Oil Prices on World Politics and Indian Economy

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  • Reading time:6 mins read

Most of the global economies rely on oil, which is one of the major commodities in recent times. Hence, the prices of oil affect almost every economy including India.

India is one of the largest importers of oil in the world imports around 70 percent of its total oil requirements accounting for one-third of its total imports. Consequently, the price of oil has a huge impact on India.

There had been a consistent decrease in crude oil prices globally which drop 17 percent to 46.59 US dollars per barrel in 2015 after slipping 47 percent in 2014. The current crude oil price is floating around 46 US dollars.

Impact of Oil Prices-Crude Oil
Impact of Oil Prices-Crude Oil

Impact of Oil Prices on World Politics and the Indian Economy

Fall in Oil Prices: Reasons

  • The primary reason for the falling crude oil prices is said to be caused due to tensions escalating between Shia-dominated Iran and the Sunni-dominated Saudi Arabia—the two top oil-producing nations in the world.
  • This is reflected in decreasing demand, specifically in Asia where China, the biggest economy and energy consumer, is seeing the most sluggish economic growth in a generation.
  • It has become very troublesome to cope with storing excess oil in storage tanks around the world due to large overhangs. In the USA itself, domestic crude production reached 9.6 million barrels in July 2015. Canada also went through a sharp rise in production, as heavy investment in tar sands began to yield good results.
  • In recent times, the shale gas revolution in the United States has reduced its dependence on the import of crude oil. For the global oil market, this revolution is of significance as around 20 percent of the oil production in the world is consumed by the United States.

Impact on Global Politics

  • Political realignment: Oil being one of the most essential commodities in the global world, this is bound to reflect a major jolt to the political order, where petroleum-producing states from Saudi Arabia to Russia are going to lose their prominence and geopolitical clout.
  • Relevance of OPEC: Oil is not in scarcity today. The geopolitical battle is moreover global market share than mere access to resources. Saudi Arabia seems to export to the global markets in abundance to push out higher-cost producers, especially in the United States. Further, Iran is reluctant in cooperating with the Saudis on oil. That implies the unlikely revival of OPEC.
  • Role of Saudi Arabia: It does not hold the same clout it had in the global oil market. Even after the crash in oil price, it is producing at full sway. In the past, Saudi Arabia played a balancing role for the producers in maintaining an elevated price for the supply of oil in the market for both low-cost and high-cost producers guaranteeing an income stream for all producers.
  • Role of the USA: The USA will be moving in the direction of self-sufficiency in oil and gas if its domestic shale industry is able to maintain production at lower prices. Its interest in ensuring stability in the Middle East might also decrease which may increase geopolitical tensions.

Advantages to India

India, as a major importer of oil in the world, will have the following advantages due to decreasing oil prices in the global market:

  • Current account balance: Due to the decreasing price of crude oil, India as a major importer of crude oil is able to save billions of dollars. The drop in prices would bring down the value of its imports, which will help in narrowing down India’s current account deficit.
  • Inflation: The entire economy is impacted by variation in oil price especially because the transportation of goods and services is almost impossible without it. A decrease in oil price also results in a decrease in the cost of all petroleum byproducts like tires, paints, etc. The reduced input costs would also be beneficial to many other industries associated with it.
  • Oil subsidy and fiscal deficit: In relation to the market price, the government fixes the fuel price at a subsidized rate. Hence, a decrease in oil prices results in a reduction in government fund transferred to oil marketing companies owing to subsidies and thereby, leading to low fiscal deficit.
  • According to the 2015–2016 Economic Survey report, the reduction in global crude oil prices primarily helped in restraining the petroleum subsidy bill to 30,000 crores in 2015–2016 against 57,769 crores spent in 2014–2015.
  • Rupee exchange rate: Low oil price implies a favorable exchange rate for the Indian rupee terms of Indian rupee as it will reduce its dependence for oil payments on reserved currencies like the dollar.
  • However, the negative effect is the strengthening of the dollar every time the value of oil falls. This neutralizes any benefits in favor of India due to the reduction in oil prices, as it is a major service exporter in the world.
  • According to the Economic Survey 2015–2016 report, India exported services worth 155.6 billion US dollars in 2014 which made the country the eighth largest services exporter in the world.

Disadvantages for India

India may benefit as a result of the fall in global oil prices, but it still has its repercussions which are given as follows:

  • Petroleum producers: The fall in global oil prices affects the exporters of petroleum producers in the country. It negatively affects exports from India, which is the sixth-largest exporter of petroleum products in the world.
  • In addition, for India, buyers of its exports and many of its trade partners are net oil exporters. A drop in oil price may affect their economy and hinder demand for Indian products.
  • Remittances: According to a report released from the World Bank’s Migration and Development Brief 2015, India is the world’s largest recipient of remittances of 72 billion US dollars. The Indians staying in Gulf countries are the major contributors to this money.

Hence, any drop in oil prices negatively affects the economic prospects of the Gulf Cooperation Council and, thus, remittances to India, which plays a significant part in funding the Current Account Deficit (CAD).

Impact of Oil Prices on World Politics and Indian Economy

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