Who Stands to Benefit from Lower Crude Oil Prices?

CEIC India Data Talk - May 19, 2015 The recent crude oil price slump saw the benchmark Brent price falling to a low of USD 45.13/barrel on 13 January 2015 from its peak of USD 115.19/barrel on 19 June 2014. Although the price has recently rebounded to USD 62.82/barrel on 11 May 2015, it is still very much below the average price in the region of USD 100/barrel that persisted between February 2011 and August 2014. As a net consumer and net importer of petroleum, India stands to reap the benefits during this period of low oil prices if it persists. India relies heavily on imported crude oil to meet domestic demand, with oil imports accounting for approximately 85% of total oil consumption in the fiscal year ending March 2014 (FY2014). Net petroleum imports have risen over the years to INR 5.71 trillion during FY2014, almost double the amount compared to five years ago. Cheaper oil would thus help reduce India’s widening trade deficit (totalling INR 8.26 billion in FY2014). As one of India’s largest imports, crude oil rose to INR 8.65 trillion (31.81% of total imports) during FY2014 from INR 4.09 trillion (25.34% of total imports) five years ago. Assuming that its export basket remains constant, the overall savings from lower crude oil prices would help to close the trade gap and in turn contribute to narrowing the current account deficit. Domestically, lower oil prices reduce the fiscal burden of providing petroleum subsidies. In view of the potential savings in subsidies payments, India has budgeted spending only INR 300 billion on the petroleum subsidy for FY2016, a saving of INR 302.7 billion compared to the previous year. This reduction provides a useful push in its effort towards cutting governmental expenditure, en route to closing the fiscal gap. This windfall is especially significant for the FY2016 budget given that it is also focused on promoting growth through infrastructure investment, thus allowing further investment without significantly increasing overall spending. The Indian oil industry would also stand to enjoy the fruits of lower oil prices as oil companies have been supporting low domestic oil prices in India through “under-recoveries”, where fuel is sold below the market prices, generating a revenue loss. In FY2014, total under-recoveries amounted to INR 1.40 trillion, of which 47.92% and 1.48% were taken on by upstream companies and oil marketing companies respectively, and the remainder by the government. Given that it has already been selling petroleum at depressed prices, India’s oil industry has relatively less to lose during this period compared to oil industries in other countries, even though it still suffers from the potential difficulty of attracting investment. Consumers, meanwhile, are expected to enjoy cheaper petrol prices. While pump prices have declined at a slower rate than Brent crude prices, daily petrol prices in Delhi have posted a double-digit year-on-year (YoY) decline since 1st December 2014, falling to INR 56.49/litre on 3rd February 2015 (a 22.01% YoY decline), before rising moderately to INR 63.16/litre on 1st May 2015 compared to INR 71.41/litre a year ago. These effects extend to the alleviation of inflationary pressures; India’s consumer price index growth slowed to 5.17% YoY in March 2015 from 8.25% YoY during March 2014. The dampened inflation rate provides the Reserve Bank of India (the central bank) with more leeway in cutting its policy rate to boost the economy. As a net importer and consumer of oil, cheaper crude oil brings an overall positive impact on the Indian economy, benefitting especially domestic consumers of petroleum. Evidently, India’s consumption of petroleum has risen sharply in recent years, partially fuelled by its automobile ownership boom, particularly among the thriving urban middle-class benefitting from India’s emergence as an economic powerhouse. With domestic automobile sales growing at a compound annualized growth rate of 9.95% for the past five years, to 19.75 million units in FY2015, the demand for petroleum is expected to accelerate. Given a largely stagnant crude oil production level in India, the recent oil price slump has thus provided a stop-gap solution for meeting the rising consumption of petroleum at an affordable cost. By Woon Khai Jhek - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
19th May 2015 Who Stands to Benefit from Lower Crude Oil Prices?

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