Rising oil prices

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Rising oil prices

Oil prices have recently hit a seven-year high on supply concerns.

Oil prices have exceeded a dollar. The price has reached a seven-year high. The reason responsible for this is apprehension related to supply constraints.

This fear stems from growing hostilities between the Iran-aligned group (the Houthi in Yemen) and the Saudi Arabia-led coalition.

Like most commodities, the major driver of the price of oil is its supply and demand in the market.

Effect of hike in crude oil prices:

  • Increase in the country’s import bill (about 20% of India’s imports). This resulted in a negative impact on the current account deficit.
  • Increase in inflationary pressure on the entire economy.
  • The government is forced to cut taxes on petroleum and diesel. This can lead to loss of revenue and affect the fiscal balance.
  • Rise in crude oil prices impacts raw material costs for refining, lubricants, aviation and tyres, etc. Thus their profitability also comes under pressure.

Other supply side factors leading to rise in oil prices:

  • Crude oil supplies disrupted due to reduced drilling by shale gas producers in the US and storms in the Gulf of Mexico.
  • Strictly regulating the supply of oil by the Organization of the Petroleum Exporting Countries (OPEC) to set prices favorable to its member countries.
  • Natural gas supply from Russia is lower than expected after OPEC acted with Russia as OPEC+ to decide global prices and supply.
  • Geopolitical tensions prevailing in the Middle East. This includes most of the oil producing countries.

Demand Side Factors for Rising Oil Prices

  • Supply chain issues with coal in China have fueled demand for oil. This has made the situation more serious.
  • The winter season is putting pressure on the prices even in normal times.
  • The reopening of global economies following the devastating COVID-19 pandemic has resulted in a sharp increase in fuel demand.

Source – The Hindu

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