Simplified Laws Guide to Taxation and Legal Concern Global crude oil prices are on free fall during the last three months. This has resulted in the reduction of petrol and diesel prices in the local market. The price of petrol has come down from Rs.82 to Rs.70 and diesel prices have come down to Rs 55 As per our experience, once the price of any product goes up, it will never come down. Obviously, all of us are curious to know the reasons for the fall in prices, isn’t it? Here are the probable reasons.
Global Crude Oil Brent prices have fallen from $ 116 to $ 70 per barrel (to the level of price in 2010-11)
The probable Reason – 1: Shale Oil production in USA
US is the biggest consumer of oil in the world. They consume 2 times the consumption of China or 6 times the consumption of India. US is also the largest importer of oil in the world. Today, they are trying to find oil in their own country and reduce the imports. (Imagine, if US stops importing oil from the Middle East!)
US is producing oil called Shale Oil. Shale Oil is unconventional oil produced from Oil Shale rock fragments by pyrolysis, hydrogenation or thermal dissolution.
The probable Reason – 2: Lower demand in emerging markets
Why the prices of oil go up? It’s simple. The supply of oil is not sufficient to meet the demand. The demand for oil in markets such as China, Brazil, Japan and Europe is weakening. This has led to excess supply of oil than the demand. Whenever the supply is more than the demand, the price of such product falls.
The probable Reason – 3: No cut in production and supply of oil
Whenever the prices of oil were falling in the past, the oil producing countries OPEC (Organization of Petrol Exporting Countries) used to cut the production and supply of oil. Thereby, with lower supply, the prices used to stabilize/increase. But this time, they had a meeting at Vienna on 27th November and decided (or were undecided) about the no cut in production.
The probable Reason – 4: Production has resumed in Libya
One of the oil producing countries Libya underwent a civil war in the recent past. However, the situation started improving in the last couple of months and thus they have resumed supply of crude oil to the market. Similarly, despite the war like situation in Iraq, the oil production has not reduced.
The probable Reason – 4: Price war
You may be aware that US is the biggest consumer of oil in the world. Today, they are sourcing oil by themselves (shale oil as explained above). So, the OPEC feels, if the oil price is reduced then the local production at US won’t be economical and thus many of these companies may wind up their business. Will this price war work? Time will decide.
India’s gain
Lucky New government! Modi government would have taken atleast 2 years to settle the problem of current account deficit, inflation, etc. The big bang growth initiatives would have stayed in the drawing room. Today, thanks to falling crude oil prices, the government has to act swiftly to accelerate the growth in the country.
Secondly, US will largely benefit. Their economy will start looking up. Indirectly, the countries like India who are looking for US markets (for export of software and other products) will also gain in the bargain.
Who will suffer?
The oil producing countries such as Iran, Russia and others will suffer. Their economy will have a serious setback.
Will the free fall continue for some more time?
Yes. Exporters feel that the crude prices may come down to $ 50 per barrel. At least, the prices will be lower for the next 6 months. To put it simply, the petrol price per litre may come down to Rs.55 and the diesel to Rs.40! Inflation may come down to around 4% and the bank lending rates to around 10%, home loan rates to around 8.5%.
Thought for the day
Do not educate child to be rich. Educate him to be happy. So when he grows up, he will know the value of things, not the price.
