7 Effects of Global Oil Price Changes on India

Introduction

Three of the most essential commodities for human living are food, shelter, and clothing. However, an economist may want to add another item to this list: ‘Oil’. This may come as a surprise to many, but the truth is that a professional global oil analysis dictates how the economic conditions of a country may change from time to time. Because India is dependent on imports for up to 80% of its needs, the price fluctuations impact remains a critical factor for national stability.

Reasons for the Increase in Global Oil Prices

1. Supply and Demand Dynamics –

The market works in such a way that when demand is greater than the supply,  then the price of a product increases. The opposite happens when demand is less than the supply; then the price deflates as well.

2. OPEC and Allied Producers’ Decision –

OPEC is an intergovernmental organization consisting of the leading producers of petroleum. The decisions made by this organisation or countries involved in the production of oil influence oil prices.

3. Geopolitical Tensions and Conflicts –

Conflicts between nations, ownership over petroleum reserves, and political instability often play a role in the price of oil.

4. Currency Exchange Rates –

Petroleum is bought using US dollars. The stronger the dollar is, the more countries with weaker currencies will have to pay for oil.

Impacts of Global Oil Price Change

Oil has some major impacts on how our economy works. Let’s learn more about this topic –

1. Rise in Inflation –

As oil prices increase, it automatically increases the price of any goods and services. This happens as a result of increased logistics and transportation costs. This is called cost-push inflation.

2. Effect on Trade Deficit and CAD –

Exorbitantly high prices increase the value of the trade deficit. This further increases the Current Account Deficit, which then has to be paid from foreign exchange reserves.

3. Impact on Fiscal Deficit –

The increase in oil prices is often mitigated by the Indian Government. through subsidies. However, this also increases the value of the fiscal deficit.

4. Impact on Economic Growth –

Any industry that has to purchase oil for manufacturing or auxiliary work will be affected by oil price fluctuations. So if the cost is too high, the  profitability of said industry ends up going down, and that is reflected in our GDP.

5. Sector-wise Effects –

• Negative impact:

Aviation, logistics, chemicals, and power generation sectors suffer when oil prices rise. This means that manufacturing and service sectors would be negatively affected.

• Positive impact:
  Domestic oil producers benefit from higher prices, while oil marketing companies may face margin pressures depending on price controls. This means that production sectors would be positively affected.

6. Exchange-rate Pressure –

The exchange rate for every dollar increases, which means the value of Indian currency keeps depreciating as we have to spend more money to buy oil. A weaker rupee further increases the cost of imports, thus getting caught in a vicious cycle.

7. Stock Market and Investor Sentiment –

The stock market may enter a bearish period as a result of fewer people investing in any companies.

References

[1] IAS Gyan, “How Rising Oil Prices Impact Indian Economy,” 2023. [Online].
Available: https://www.iasgyan.in/daily-current-affairs/how-rising-oil-prices-can-impact-indian-economy

[2] International Journal for Research in Applied Science & Engineering Technology (IJRASET), “The Impact of Crude Oil Productions on Indian Economy,” 2022. [Online].
Available: https://www.ijraset.com/research-paper/impact-of-crude-oil-price-fluctuations-on-indian-economy

[3] SAHI Blog, “Impact of Crude Oil Prices on Indian Economy,” 2023. [Online].
Available: https://sahi.com/blogs/how-oil-prices-shape-the-indian-economy

FAQs

1. What is the primary goal of conducting a Global Oil Analysis?
A global oil analysis identifies market trends to protect energy sectors from a sudden price fluctuations impact.

2. How does a Global Oil Analysis improve IT and business performance?
Performing a global oil analysis allows businesses to hedge risks and stabilize costs against a negative price fluctuations impact.

3. Can small businesses benefit from a Global Oil Analysis?
Yes, a global oil analysis helps smaller companies manage their logistics budgets against the price fluctuations impact.

4. Why are updates vital for Global Oil Analysis and price fluctuations impact?
Regularly updating your global oil analysis ensures your financial strategy accounts for any new price fluctuations impact.