Rising Crude oil prices – A Threat

RISING CRUDE OIL PRICES [Download pdf]

Why in news?

The article talks about the possible effects of  current rising of  crude oil prices on India.

PRELIMS (FACTS)

OPEC – Organisation of Petroleum Exporting Countries

OPEC is a permanent intergovernmental organization of 14 oil-exporting developing nations that coordinates and unifies the petroleum policies of its Member Countries.

OPEC’s formation by five oil-producing developing countries in Baghdad in September 1960 occurred at a time of transition in the international economic and political landscape, with extensive decolonisation and the birth of many new independent states in the developing world.

The OPEC Secretariat is the executive organ of the Organization of the Petroleum Exporting Countries (OPEC). Located in Vienna, it also functions as the Headquarters of the Organization, in accordance with the provisions of the OPEC Statute.

MEMBER COUNTRIES

The Organization of the Petroleum Exporting Countries (OPEC) was founded in Baghdad, Iraq, with the signing of an agreement in September 1960 by five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They were to become the Founder Members of the Organization.

 

These countries were later joined by Qatar (1961), Indonesia (1962), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Ecuador (1973), Gabon (1975), Angola (2007) and Equatorial Guinea (2017)

SHALE GAS

Shale gas is natural gas formed from being trapped within shale formations.

Shale gas—an “unconventional” source of methane, like coal-bed gas (in coal seams) and tight gas (trapped in rock formations)

It is Colourless, odourless, lighter than air.

In Europe shale gas is not used because of environmental rules and limited property rights.

But In America, Shale Gas use already began. In future, it might be used for fullfilling the energy requirements of US manufacturing industry.

ADVANTAGES OF SHALE GAS

A flexible fuel, can heat homes, run industrial boilers

Shale gas also provides feedstock for the petrochemicals industry, which is turned into plastics, fertiliser and other useful stuff.

Experimental Usage as fuel for trucks, lorries and buses.

Shale-gas is cheaper than gas, releases 50% less CO2, hence better source for generating electricity.

Shale gas power stations are safer than nuclear reactors and cheaper than renewables sources such as solar electricity cell.

LIMITATIONS OF SHALE GAS

Storage & Transportation = difficult + expensive

Therefore, Shale gas not traded in international-commodity market unlike coal or crude oil. Not even 33% of the shale gas is traded in interntional market

It has no global price comparision platform.

Gas prices in different parts of the world are set by quite different mechanisms, they vary wildly across the world.

To construct Gas pipelines, you’ve to spend millions of $$ per km.

alternatively, we can transport shale gas in liquid form, like LNG. But such LNG-terminal will also require huge investments

NOTE: Gazprom is Russia’s huge state-run gas producer and supplier of 25% of Europe’s gas.

SHALE GAS IN INDIA

Potential Sites: Cambay, Gondwana, Krishna-Godawari onland, and Cauvery.

Public sector companies and corporations like ONGC, OIL and GAIL are exploring these sites.

Subject matter falls under Director General of Hydrocarbans (DGH)

MoU have been signed between USA, and India for sharing technical knowledge in shale-gas exploration. This is one area where USA is far ahead of us, we’ve much to learn from them.

MAINS (ANALYSIS)

India had Benefited from lower crude prices

As a large importer of crude oil, India benefited significantly from lower prices

It helped contain inflation and had a favourable impact on both the fiscal and current account deficits

Rising prices of crude oil

Oil prices touched a two-year high earlier this week and have gone up by about 14% over the last one month

Reason behind this increase: prices could remain elevated owing to several reasons, such as

(1) drawdown in inventories, especially in the US,

(2) better compliance with the voluntary production cut by the Organization of the Petroleum Exporting Countries (Opec),

(3) slower pickup in US shale oil and continued geopolitical risk in West Asia

Other reasons behind this increase in prices

OPEC members reduced production more than they had initially agreed tofurther, the internal power struggle in Saudi Arabia has added to the uncertainty

According to the International Monetary Fund, Saudi Arabia will need oil prices to be at $70 per barrel for fiscal break-even in 2018

Members of Opec will meet later this month and it is likely that they will work to push oil prices to around the $70 per barrel mark in the coming year

Challenge infront of India due to this increase

Even though India is in a relatively strong macroeconomic position, a higher level of oil prices could still pose challenges for policymakers

However, higher oil prices could have the opposite effect and impede economic recovery in the coming quarters

They could have implications for growth, inflation, currency, current account deficit and fiscal deficit

But given India’s macroeconomic position, the impact of higher oil prices on individual indicators may not look worrying as of now

But put together with added uncertainty related to revenue and economic activity due to teething problems with the goods and services tax, could worsen the outlook for India

Other effects on Indian Economy

Expectation of higher inflation will reduce the chance of a potential rate cut and could affect market sentiment

Higher oil prices will also affect corporate India’s profit margins and could delay the much awaited earnings revival

A relatively less favourable macro outlook and a decline in profit margins would affect the equity market where stocks are richly valued

The way forward

The situation is not alarming for India at the moment, but policymakers would do well to remain watchful

It is likely that the RBI’s monetary policy committee will mull over the possible fallout

Meanwhile, the government would be well advised to avoid reducing duty if prices remain at higher levels

It would need higher revenue to push capital expenditure and move forward with fiscal consolidation

It will be extremely important to keep fiscal deficit in control in order to protect hard-won macroeconomic stability

QUESTION BASED ON THE TOPIC

How could the rise in crude oil prices impact Indian Economy and how can India find an alternative source for its fuel needs?

SOURCE – THE HINDU (11/11/2017)