Impact of Global Oil Price
Brent crude prices have dropped dramatically in the last ten days; the prices have fallen to under USD 90 per barrel while they were trading at around $110 per barrel in July 2022.
What led to the drop in Global Crude Oil Prices?
The crude prices fell sharply by around 4%, and the decline has come despite the Organisation of the Petroleum Exporting Countries (OPEC+) plus announcement to cut supply by 100,000 barrels per day beginning October 2022 in a bid to prop up the prices.
While prices have been softening in recent months, the recent sharp drop is due to renewed fears of a European recession and a drop in demand from China, which brought in new Covid lockdown measures amid weakening factory activity.
There is concern that these factors will reduce future crude oil demand. According to market participants, OPEC’s decision to cut production indicates that it expects a decline in demand and further price softening.
Impact of the rise in Global Oil Price
The rise in import bills not only leads to inflation and a rise in current account deficit and fiscal deficit but also weakens the local currency against the dollar and hurts stock market sentiment.
A rise in crude oil prices also has an indirect impact as it leads to a rise in edible oil prices, coal prices, and also that of fertilizers as they use gas as feedstock. Gas accounts for a good percentage of all fertilizer production costs.
So, if a rise in crude oil prices could lead to a much-enhanced import burden, it also leads to a reduction in demand in the economy, which hurts growth.
It could also lead to a higher fiscal deficit if the government chooses to bear the burden by way of subsidies.
Impact of Fall in Global Price:
A drop in crude oil prices is welcome news for all stakeholders, including the government, consumers, and corporations. If oil prices remain low, it will lead to lower inflation, higher disposable incomes, and, as a result, higher economic growth.
On the one hand, it reflects expectations of a slowdown in global growth, which may have an impact on a country’s growth as well, but on the other, it is a welcome relief.
As companies across sectors are sensitive to crude oil prices, falling crude oil prices have also played a role in the index rise on equity and debt markets.