Why lower crude oil prices could be good for the economy

Why lower crude oil prices could be good for the economy

Considering that India's petroleum imports have risen by a staggering 60 per cent between April-October this year, exerting pressure on the currency, lower oil prices if sustained could help bring down the import burden, ease the risks to macroeconomic stability.

On Monday, crude oil prices fell to their lowest levels this year as protests across major cities in China against the imposition of stringent Covid restrictions raised concerns over the economic outlook. Brent crude oil is currently trading at around $81, down from the $120-130 levels seen after the Russian invasion of Ukraine. The volatility in crude prices is unlikely to subside in the near term. The Organisation of Petroleum Exporting Countries and its allies are meeting over the weekend to discuss their output level even as the EU countries continue to debate capping the price of Russian oil and the US allows Chevron to restart oil production in Venezuela.

For an oil importing country like India, lower prices could help ease price pressures in the economy and bring down the current account deficit. In January, the average price of crude imported by India stood at $84.67 per barrel. Thereafter, prices rose to $112.87 in March, and further to $116 in June. However, since then, crude oil prices have been on a downward trend. As per latest data from the Petroleum Planning and Analysis Cell, the price of the Indian basket has fallen to $82.14 as on November 25. This price is based on the crude basket comprising of sour grade (Oman and Dubai average) and sweet grade (Brent), which suggests that it perhaps does not take into account the recent discounts received in buying oil from Russia. To the extent that lower crude oil prices are passed on to consumers — retail prices have not been changed since May 22 — it could have a cooling effect on inflation. The RBI’s projections which peg inflation at 6.15 per cent in the second half of the year assume crude at around $100 per barrel. The government should, however, not exert pressure on oil marketing companies to reduce prices, even as it should refrain from raising the excise duty.

Lower crude oil prices will also have a bearing on the country’s current account deficit. As per some estimates, every dollar reduction in oil prices lowers the current account deficit by around $1.4 billion on an annualised basis. Considering that India’s petroleum imports have risen by a staggering 60 per cent between April-October this year, exerting pressure on the currency, lower oil prices if sustained could help bring down the import burden, ease the risks to macroeconomic stability.