World oil prices, already lower than they have been in six months, are not likely to recover anytime soon, going by market conditions. A further increase in supply, compounding the current glut, and a parallel contraction in demand in the major consuming nations, are likely to keep prices low. The ongoing fall in prices stems largely from simple demand-supply mechanics. The shale revolution in the United States has drastically increased the supply of oil. And several international events are likely to further boost supply to levels far exceeding demand. Notably, the nuclear deal between Iran and the West has further depressed prices owing to the expectation that sanctions on Iran would soon be lifted, allowing it to again supply oil to the world. In addition, Saudi Arabia is moving strongly to increase refinery capacity, which will further add to global supplies. This comes on top of OPEC output in July hitting its highest levels in recent history. On the demand side, the increased supply has been met by recessionary or slow-growth conditions in most industrialised countries, which have greatly moderated their consumption since the economic crisis. Now, however, this contracting demand has been compounded by slowing economic growth in China, one of the biggest consumers of oil.
Falling oil prices serve as good news for some, but pretty bad news for others. Russia, for example, has 70 per cent of its export income coming from oil and gas. Falling oil prices, thus, have hit the Russian economy hard — the country, it is reported, loses about $2 billion in revenues for the fall of every dollar in oil prices. The World Bank has warned that the Russian economy would shrink by at least 0.7 per cent this year if oil prices do not rebound. On the flip side, European economies are likely to welcome falling oil prices, beset by poor growth and low inflation as they currently are. Some estimates predict that a 10 per cent fall in oil prices could lead to a 0.1 per cent increase in output for them. India is one of those countries that stand to benefit significantly from falling prices. The country imports about 75 per cent of its oil needs, so cheaper oil benefits it directly by easing the current account deficit while simultaneously lowering the government’s petroleum subsidy burden. However, the latter point is now somewhat mitigated by the fact that petrol and diesel prices have been decontrolled. The month of July saw two separate cuts in the prices of petrol and diesel — although the question that really needs to be asked is why petrol and diesel prices are not being cut commensurate to the fall in global prices. Will that question be addressed anytime soon?
