Corona has certainly created havoc. But, surprisingly, it is not only the germ that is to be blamed. There is more to it than meets the eye. Since the last few years, global price harmony has been hurting. The United States has been actively involved in negotiations with the second and the third largest oil producers of the world: Russia and Saudi Arabia respectively. In the year 2017, a consensus among the top crude drillers of the world was achieved in which it was mutually agreed that reductions in the global crude cache of varying magnitudes will be continued till April 2022. It was backed by the US, the Organisation of the Petroleum Exporting Countries (OPEC) and Russia as well. This was endorsed so as to bring much-needed stability in prices. A uniform price range was the objective. But, of late, this alliance seems to be succumbing. Recently, Saudi Arabia expressed its intentions to ramp up the production of oil. Furthermore, Russia has also been walking on the path of retaliation. The result of this head-on collision has been a price war between the two countries. As a result, the supply of oil heightened and the prices went tumbling down. So, there is much more than just corona that has suppressed the crude rates. It’s the problem of storage and the price war between Russia and Saudi that has a proportional part in the crisis.
Why is America worried the most?
After China, the United States is the second largest importer and consumer of oil. During the last many years, the U.S has strengthened its own oil harvest impressively. Moreover, the American benchmarks are the globally accepted standards when it comes to the crude oil trade. The crude business is also carried out in US Dollars. Together, these feathers in their cap make petroleum business all the more important for them. Trump administration has been running from pillar to post to arrange talks and agreements among the world’s top oil-producing nations such as Russia and Saudi Arabia. It’s because protecting its own oil manufacturing sector from the winds gusting over from other countries and thereby maintaining a harmonious price, have been the biggest unique selling points of any American administration. That is the reason why Donal Trump backed the moves by OPEC and Russia to cut production lately.
Now, when America has a blooming domestic oil production sector, the sudden price shock has given a toothache to them. Now, fear is looming large on the oil-producing companies of US. The gap between the costs associated with drilling out oil and the prices available has become unbridgeable. They are unable to meet their break even figures of around $50 a barrel. Lack of storage spaces have put salt over the wound. That’s not all; around half a million people are employed in these companies. Their job security is at stake. If it continues unabated, the companies may find bankruptcy route easier than business and, consequently, the jobs will be gone.
If crude prices have fallen in a such a drastic way, why hasn’t India reduced the prices of petrol, diesel, etc?
India is the third largest oil importing country after China and the US. It imported oil worth $115 billion in 2018. It is an oil-intensive economy with 70 to 80% oil dependence. India exports from the OPEC block, i.e., Brent Crude coming from the North Sea in Norway. Although, Brent crude is comparatively stabler, yet not immune to the price drop; it has also suffered huge losses. Currently, it trades around $43 a barrel. India is now getting oil imports at current rates which are far lower than the usual rates. Ideally, it should have passed on the benefit to public. But, the same has not been done yet and it’s unlikely that any such step will be taken in near future.
Every country has an account of trade with other countries. Ideally, a country works out so as to achieve a balance between imports and exports. If a country pays more than what it receives or imports more than what it exports, it’s in a situation called fiscal deficit. India is benefitting from the global crude crisis as it gets oil at lower rates and the profit gap is being used to flatten the deficit and achieve a balance of trade with other nations. To put it in simpler terms, India is using the money saved here to lessen its fiscal deficit. It also makes sense when we talk about the Indian domestic oil companies who enjoy government subsidies to sustain; India uses this opportunity to off-set fiscal gap against the subsidies to state-run oil companies. That is the reason why we are not seeing any reduction in fuel prices on ground.
Postscript: Crude is the blood of the global economy. A crisis in this sector affects every country. Moreover, anything that happens to the economy in America has ripple-effects that extend to all economic waters across the globe. The current crisis will send concussions everywhere. However, man is helpless right now. We are caught between the devil and the deep sea. We can’t work because of the pandemic and if we don’t work, the economy is going to deteriorate in coming days. Tough times are ahead. However, there is a flip-side. The global lockdown has reduced the emissions of Green House Gases (GHG). Carbon dioxide emissions have gone down by 1.2%. Satellite images of China released by NASA show reduction in pollution. This may be the silver lining around the cloud.
(The author, an MBA, NET, IBPS, works as Manager in the Middle Management of a reputed PSU; the views are personal.)