CRUDE OIL & ITS IMPACTS

Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. A type of fossil fuel, crude oil can be refined to produce usable products such as gasoline, diesel and various forms of petrochemicals.

IMPACT OF CRUDE OIL

• IMPORT BILL: INDIA’S crude oil import bill is likely to jump by about 2 billion dollars in 2018-19 as rupee is continuously depreciating. INDIA which import more than 80% of its oil needs, spent 87.7 billion dollar, on importing 220.43 MT of crude oil in 2017-18. For 2018-19 it will increase to 227 MT.
•  INFLATION CONCERNS: The Reserve Bank of India (RBI) increased its key repo rate by 25 basis points to a two-year high of 6.50 per cent, in a move that is seen as an attempt to keep inflation under check. The August move came after the Consumer Price index based inflation rate rose to a five-month high of 5 per cent in June, overshooting the Reserve Bank of India’s (RBI’s) projection of 4.8-4.9 per cent .
• CORPORATE PROFIT MARGIN: There are several industries and companies which use crude oil and its by-products as raw material for their final products. Companies dealing in tyres, plastics, chemicals, fertilizers, wax industries, refining, airline, paints, footwear, lubricants, cement, logistics and construction materials for whom crude or its derivatives are major inputs/costs will take a hit on their margins in case of high oil prices.

WHY BRENT OVER CRUDE??

The reason is that, the price between the two is a short-term phenomenon. In any case, loading, inland movement and a longer ocean voyage involved in buying American crude oil narrows down the price difference to a point where it is not worthwhile.

CRUDE OIL VS CURRENCY

There is an inverse relationship between crude oil prices and INR .With the strengthening of crude oil prices, INR falls. The rupee slumped to an all-time low of 70.81 against the dollar, for a total of 10.97-percent depreciation since the beginning of this year. Rising oil prices and the weakening currency have already created a perfect storm for India, where oil demand growth has been surging, but the higher oil prices are increasing the country’s spending on crude oil imports, which account for 80 percent of Indian oil consumption.

“Higher oil prices and interest rates will put pressure on the government’s budget and the current account.

Ankit Jain, 

MBA-FA(2018-20)