Lower Oil Prices Do Not Mean Cheaper Fuel, Why? | Mint Primer | Mint

Summary

The video analyzes the impact of falling crude oil prices on the Indian economy following the Russia-Ukraine conflict. After peaking in March 2022, oil prices dropped to $76.1 per barrel by December 2022, offering potential relief for consumers and the economy. India, heavily reliant on imports for its oil needs, saw its import bill fluctuate with global prices. While immediate consumer benefits may be limited due to companies recovering past losses, lower oil prices can strengthen the rupee, save foreign exchange reserves, and reduce the current account deficit. Overall, sustained low prices are positive for consumers, producers, and policymakers alike.

Takeaways

• 📉 Crude oil prices, which surged after Russia invaded Ukraine in March 2022, fell to $76.1 in early December 2022.
• 💹 Falling oil prices bring relief to the global economy, but retail consumers in India may not immediately benefit.
• 🛢️ Crude oil is essential for petroleum products like diesel, petrol, and aviation fuel, impacting all economic activities.
• 🇮🇳 India is the world's third-largest crude oil importer, sourcing about 84% of its domestic requirement.
• 💰 India's crude oil import bill in FY22 was $119.2 billion, with price fluctuations directly affecting the bill.
• 📈 High oil prices in March 2022 led to India spending $13.7 billion, up from $8.4 billion in March 2021.
• 🌍 Global oil demand has been declining due to fears of recession in developed economies and COVID-19 curbs in China.
• ⚖️ Some countries continued importing Russian oil at concessional rates despite international pressure, balancing economic interests.
• 💸 Falling rupee value reduces the benefit of cheaper oil for Indian consumers, while oil marketing companies seek to recover losses.
• 💹 A sustained decline in oil prices could improve India's foreign exchange reserves, strengthen the rupee, and reduce the current account deficit.
• 🏦 Lower oil prices benefit not just consumers and producers but also government policymakers by easing economic pressures.

Q & A

What caused crude oil prices to peak in March 2022?

Crude oil prices peaked in March 2022 at $127.98 due to the Russia-Ukraine war, supply chain disruptions, and global economic uncertainties following the conflict.

How low did crude oil prices fall in early December 2022?

Crude oil prices fell to as low as $76.1 per barrel in the first week of December 2022.

Why is crude oil important for the Indian economy?

Crude oil is the basic input for petroleum products like diesel, petrol, and aviation turbine fuel, which directly or indirectly impact almost every economic activity in India.

What percentage of India's crude oil requirement is imported?

India imports about 84% of its domestic crude oil requirement, making it the world's third-largest oil importer.

How did high crude oil prices in March 2022 affect India's import bill?

High oil prices led India to spend $13.7 billion in March 2022 compared to $8.4 billion in March 2021, significantly increasing the import bill.

What factors contributed to the decline in oil demand after the Russia-Ukraine war began?

The decline in oil demand was due to fears of a recession in developed economies, COVID-19 curbs in China, and Western countries pressuring importers to reduce purchases from Russia.

Why might Indian consumers not immediately benefit from cheaper oil?

Consumers may not see immediate relief because rupee depreciation offsets the benefits of cheaper oil, and oil marketing companies may recover past losses, limiting price reductions.

How can falling oil prices positively impact India's foreign exchange reserves?

A lower import bill reduces the outflow of foreign currency, helping to save foreign exchange reserves, improve the current account deficit, and potentially strengthen the rupee.

What long-term benefits could falling crude oil prices provide to India?

In the long term, lower crude oil prices can benefit consumers, producers, and policymakers by reducing costs, improving economic stability, and enhancing overall import capacity.

How did oil marketing companies respond during the period of rising oil prices?

Oil marketing companies absorbed part of the rising cost burden, which reduced their profit margins during the period of high oil prices.

What role does the rupee's value play in determining the impact of cheaper oil on consumers?

A continuously falling rupee can offset the benefits of cheaper oil because importing oil becomes more expensive in local currency, reducing the immediate relief for consumers.