By Ananya Upadhyay
There has been a sharp decline of 55% in global crude oil prices over the past 6-7 months. Prices have dipped from about $115 per barrel in 2014-15 to as low as nearly $30 per barrel recently. The fall in crude oil prices is primarily due to its excess supply and differences between the OPEC (Organization of the Petroleum Exporting Countries) nations which led to the failure of limitations on oil production.
Strengthening of the US dollar is another cause of the declining oil prices. As the global commodity prices are measured in US dollars, their prices fall when the dollar becomes strong. The surge in availability and accessibility of unconventional energy resources is also a major reason for the consistent downward trend of prices. While life is easier for an average consumer, many fossil fuel energy exporting nations are facing significant revenue shortfalls.
Good news for the Indian Economy
India, being an oil-importing nation, stands to benefit from the price fall. India imports more than two-thirds of its oil requirement and oil imports constitute 37% of total imports. A one-dollar fall in the price of oil spares the country about 40 billion rupees. Thus, low crude oil prices will increase our foreign exchange reserves. It will further improve the current account deficit, enhancing the value of Indian currency in the international market.
India will also save money on petrol and diesel subsidies, as global and domestic rates get closer. Inflation rates will come down. All this may encourage the central bank to reduce interest rates, which can trigger the demand for industrial goods.
Costs and benefits for Indian industries
Lower crude oil prices will reduce input costs for paint manufacturing companies as they use titanium dioxide, a crude oil derivative, as a raw material. Similarly, the cosmetic industry is a heavy user of paraffin, again a crude oil derivative.
In a good news for auto and tyre companies, falling oil prices will lower the cost of running automobiles and will encourage people to buy vehicles. The transportation and logistic sectors will also benefit as their costs will come down. As operating costs of tractors and machinery will be lesser, agriculture will be the next to be benefitted. In 2014, the BSE Auto index rose by 51.78% to 18,631. Eicher Motors rose by 202.42%, followed by Maruti Suzuki (88.75%), Hero MotoCorp (48.77%) and Tata Motors (32.33%).
Moreover, crude oil derivatives account for a large part of raw material costs of several fast-moving consumer goods (FMCG) companies. Notable derivatives are High-density Polyethylene (or HDPE, used for packaging), Light Liquid Paraffin oil (or LLP, used in creams and hair oils) and Linear Alkyl Benzene (or LAB, used in detergents). Fall in LAB and LLP will impact detergent and personal care companies. Packaging accounts for 15-30% costs for FMCG companies, so fall in HDPE prices is estimated to boost margins by 6-8%.
A stronger rupee is likely to benefit aviation companies as it means lower dollar-related payment. With crude oil prices down 50% from their peak levels, aviation fuel cost will go down. This will spur demand for travel and push airlines to increase capacity.
The downside
For upstream oil companies like Oil and Natural Gas Corp. Ltd and Oil India Ltd, lower oil prices do not augur well, as they translate into lower net price realisation. These stocks have outperformed the benchmark Sensex in the past one year too. However, lower crude oil prices pose a risk to any potential expansion in their valuations in the near future.
Looking ahead: Will the downfall continue?
Owing to the low prices of oil and anticipation of further fall, Saudi Arabia is restructuring its economy which was and is still primarily based on revenue from oil exports. With climate change woes, use of unconventional energy sources is on the rise. Due to this shift to cleaner energy sources, the trend of declining oil prices is likely to continue in the long term.
The falling oil prices have created huge volatility in India. While most experts believe that the low oil prices are here to stay, some say the prices have bottomed out and expect them to rise in the future. However, by the time prices stabilise, the Indian rupee will have strengthened against the US dollar. Further, the country will have emerged as a more attractive spot for capital investment against other emerging markets like Brazil, which is performing poorly due to falling iron-ore prices, and Russia, which is reeling under the oil price fall.
Featured Image Credits: Visual Hunt