Global uncertainty keeping Oil prices volatile: Could impact India’s budget deficit and growth

The global economic scenario is going through turbulent times. The problems in the Middle East coupled with problems brewing up in South East Asia between North Korea and USA could significantly impact the supply of crude, AM is reiterating its bullish call on crude oil, as the fossil fuel sits at four week highs following this week’s U.S. missile attack on Syria.

Keeping the above scenario in mind, leading analysts foresee prices to climb to the high of $60s within months — a nearly 20 percent move from current levels. That would translate to roughly a $1.80 gasoline spot price. According to analysts summer driving season would give a boost to Oil prices and they do not expect oil prices to fall anytime soon”.

Crude initially jumped two percent as the news of U.S. airstrikes on Syria started coming before giving back some gains. The commodity settled up one percent on Friday to $52.24 a barrel, its highest settle in a month. However, crude is still down nearly three percent so far this year.

There is no immediate supply disruption threat, since Syria’s six-year-old civil war has moved the majority of local production offline. However, analysts pointed out a few wildcards, which include potential new strains between Russia and the Sunni Arab Gulf Cooperation Council (GCC) states, and whether the U.S. strikes could give hardliner candidates a lift in Iran’s presidential election in May. These situations could also propel prices higher.

All this uncertainty could have a dramatic impact on the budgets of Oil importing countries like India. High and volatile prices may lead to trade and fiscal imbalances, a crisis of consumer confidence and rising inflation, as well as a weakening competition and the regulatory framework: while price volatility creates uncertainty in energy planning and investment, which affects economic growth. In light of the variation in the timing and duration of these problems—ranging from short-term hindrances to permanent changes in the macro economy—an effective solution calls for a multi-horizon strategy. The degree of demand elasticity for electricity and vertical integration in the sector influences how utilities are affected by high and volatile prices.

A country will, irrespective of its stand as an oil importer or an oil exporter, be affected by the uncertainty in oil prices due to its trade and capital-flow links with other oil-exporting countries. Moreover, international trade is affected by the uncertainty and volatility of oil prices in terms of increased risks facing both importers and exporters. The competitive advantages of both net-oil exporting and net-oil importing countries could fall quite substantially as a result of oil-price fluctuations.

A change in the oil-price level as well as its variability poses many challenges to a diverse range of actors in the global market: Governments and institutions meet increasing difficulties in predicting the oil price and reacting to its changes; financial institutions have put forth specific efforts to hedge themselves from the risks associated with variability in oil-prices; and globalization and international trade fares badly in times of large oil-price variability. While researchers have put much effort into refining the techniques for predicting the oil-price level, challenges to forecast it accurately still remains.

This sharp increase in the world oil prices is generally regarded as a factor discouraging economic growth. Particularly, during highs, when recorded in the world oil market brings apprehension about possible slump in the economic growth in both developed and developing countries.

The overall effect of changes and uncertainties in oil prices on the economy as a whole depends on many parameters, including a country’s position in the oil market, its degree of competitiveness, the very composition of its competitive advantage, as well as the specific nature of the oil price shock.

These price shocks have raised serious concerns among the policy makers all over the world. The adverse economic impact of higher oil prices on oil-importing developing countries is generally considered as worse than for the developed countries because of their more reliance on imported oil and as they are more energy-intensive.

Importantly, the effects of severe oil price changes do not have to be only negative. Low oil price opens up for the opportunity to “correct course” through investments in greener technology and energy systems. In this way, economies might be able to hedge themselves from the harm that oil price fluctuations make to their markets and economies — irrespective of their stand as oil consumers or oil importers — and simultaneously take steps towards building a new climate economy.

India as an oil importing country stands to lose during the volatile and high oil prices scenario. The Indian governments push towards investing in Renewable technologies like Solar and Wind are steps in the right direction. Not only would it reduce dependence on fossil fuels but also help reduce pollution which is a major problem in most Indian cities. India also has a high dependence on Atomic energy for power usage. A combination of Atomic and Renewable Energy would be the best solution for a country like India, where it would reduce its dependence on Oil and propel its economy toward the 7% plus GDP growth target.

By: Alireza Moghaddam, Chairrman, AMIDT Group