Crude oil prices crash as Saudi Arabia, Russia start price war

Crude oil prices in the international market have fallen by 30 percent. Be aware that this is the biggest drop in crude oil prices since 1991.

Why did it fall? Why Crude Oil Devaluation

• Crude prices declined after the Saudi move to start a price war after Russia balked at making further steep output cuts proposed by OPEC to stabilise oil markets hit by worries over the global spread of the coronavirus.
• Saudi Arabia plans to boost its crude output above 10 million barrels per day (bpd) in April after the current deal to curb production expires at the end of March, sources told Reuters.
• The world’s biggest oil exporter is attempting to punish Russia, the world’s second-largest producer, for not supporting the production cuts proposed last week by the Organisation of the Petroleum Exporting Countries (OPEC).

OPEC

• OPEC is a group of oil producing countries established in 1960 in Baghdad, Iraq and became effective from 1961.
• OPEC was headquartered in Geneva, Switzerland for the first five years of its formation, but over 1 September, OPEC controls more than 40 percent of the world’s oil exports.
• In 1965, its headquarters was moved to Vienna, Austria.
• The objective of OPEC is to coordinate and integrate petroleum policies among the member countries to ensure fair and stable prices for petroleum producers.

OPEC Membership

There are three types of OPEC members.

1. Founding Member
2. Full Member
3. Associate Members

Positive impact on india

• India is the fourth largest consumer of oil. He is also a major beneficiary of falling oil prices. Reduced prices will not only reduce the import bill, but will also help in saving foreign exchange.
• This will help in balancing the current account deficit.
• Lowering oil prices will also reduce the cost of production of other essential commodities and thus the overall inflation in the economy will decline, which will directly benefit the general public.
• The fall in oil prices will enable India to manage fiscal consolidation with major expenditure on major development programs and infrastructure projects.
• Due to the fall in crude oil prices, the subsidy burden for the Indian government will be reduced to a great extent, which will help in reducing the fiscal deficit.

Negative impact on India

• Exports from India to oil producing economies can be affected when the falling rate of those economies will cause an unprecedented reduction in the prices of oil.
• Apart from being the fourth largest oil importer, India is also the sixth largest petroleum product exporter in the world. Falling oil prices will damage this sector of the economy.
• A large number of non-resident Indians live in Gulf countries. If the growth rate of these oil producing countries is low then their income may be affected. This will reduce the remittance received by India.
• Due to low oil prices, fuel consumption can be high which can also increase urban pollution.
• The Center’s disinvestment program to sell Bharat Petroleum Corporation Limited (BPCL) could have a negative impact.

PAPER-II