- Analysts expect oil prices to remain depressed for the remainder of 2016.
- In 2014, after almost a decade of record highs, the price of a barrel of Brent crude began to collapse from a peak of US$140 to less than US$30.
- Saudi Arabia is lining up a US$2 trillion sovereign wealth fund to see it through the twilight years of the oil era. But not all the countries of the Gulf Co-operation Council, or GCC, have this kind of cash.
- Even for Saudi Arabia, the new era of low oil prices spells increasing budget deficits, reductions in state subsidies and a slowdown of the energy and construction sectors.
- Bahrain is still coming to terms as subsidies fall and inflation rises, people living and working in the region are starting to experience a reduction in the purchasing power of their incomes and increase in the cost of living.
- If the price remains low, reserves also will start to run out in two or three years.
- Current account balance:
India imports nearly 80% of its total oil needs which is one third of its total imports. A fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion or 0.43% of the GDP.
Because of use of oil in transportation of goods and services and fall in global crude prices decrease in prices of all goods and services thus helps reduction of inflation. Every $10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%.
- Oil subsidy and fiscal deficit:
The government compensates oil companies for any losses or under-recoveries from selling fuel products at reduced rates resulting in higher fiscal deficit. A fall in oil prices reduces companies' losses, oil subsidies and thus helps narrow fiscal deficit.
- Rupee exchange rate:
A fall in oil prices is good for the rupee. But the dollar also strengthens every time the value of oil falls. This negates any benefits from a fall in current account deficit.
- Petroleum producers:
The fall in global oil prices affects the exporters of petroleum producers in the country. India is the sixth largest exporter of petroleum products in the world earning $60 billion annually. India's buyers of its exports are net oil exporters and fall in oil price impacts their economy, and hamper demand for Indian exports.
- Remittances from abroad:
Indians remittances from abroad, mainly Gulf, were $70 billion in 2013 thus reducing current account deficit. Fall in oil prices affects oil-exporting Gulf countries and in turn affects inward remittances into India.
Oil prices at moderate levels of $50-70 is good for economic stability of the world. Either high or low oil prices hurts some nations while doling out windfalls to others.
India is immensely benefited in the last two years by saving at least Rs.500,000 crores worth in foreign exchange outflow reducing the impact on fiscal deficit, trade deficit and inflation under control, even though inward remittances from Gulf had reduced to some extent. Ruthless Modi govt retained all the benefits of low oil prices by increasing duties on petrol & diesel to alarmingly high levels making them most expensive in the world. While UPA Govt made consumers pay international market prices during high oil price regime for nearly 10 years, Modi & Jaitley though fit not to pass on benefits of reduced oil prices to consumers. This is nothing but taxing public without legislature approval and is unethical as well as immoral.
However negative effects of prolonged low oil prices will be felt here after, mainly Indians in Gulf region losing jobs and returning to India. Already diminishing exports are hurting trade deficit even though imports have also reduced to some extent.