The Slide of Oil – Positive for the Economy

Thought for the Day:

India has been an oil importing country for many years, and imports over 70% of the crude requirement. The ray of sunshine this year has been the fall in oil crude prices globally.

Oil prices (oil-price.net), jainmatrix investments

Oil prices (oil-price.net)

This 60% fall in import costs (see Fig above) will translate into over $70 billion ( Rs 4,55,000 crore) of forex savings this year.

  • These savings are spread across consumers (lower prices at the pump), businesses (lower fuel, raw material and transportation costs) and government (lower deficits, higher tax incomes through raised rates).
  • Domestic inflation too has fallen.
  • A fall in crude oil prices is particularly beneficial for sectors that use crude and crude derivatives as a raw material. Stocks of sectors such as paint, tyre, FMCG, airlines and lubricants will remain in focus.

There is of course a flip side to this fall. The Indian Oil and Gas industry suffers some disruptions. Within the industry, the Exploration and Production (E&P) firms are badly hurt as their production revenues were pegged to global crude prices. Some taxes and commissions for retailers based on percentage of price have fallen. 

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But overall India gains tremendously from crude fall. These low crude prices may also continue as the outlook for crude oil prices still looks subdued. The OPEC cartel looks weak. Crude oil production is high. And big growth in renewable and green power sources like solar and wind industries may replace oil demand over time.

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