Futures shock 

#GS3 #Economy  

The steep fall in oil prices is not all good news for India 

  • Five decades after the oil shock of 1973, when an Arab embargo on the supply of oil to some western powers including the United States sent the price of crude skyrocketing fourfold to $12 a barrel, the global economy faces a fresh shock from a free-fall in oil prices.   
  • May futures for the West Texas Intermediate (WTI) U.S. crude plunged below zero to touch a historic low of -$40.32 a barrel. A negative price implies that a seller would have to pay the buyer to hold the oil to be supplied.  
  • A perfect storm of a supply glut exacerbated in March by a price war that saw key producers Saudi Arabia and Russia ramp up output even as demand continued to contract on account of the COVID-19 outbreak sent prices into a steeper slide.   
  • The International Energy Agency observed that the confinement measures instituted worldwide have resulted in a dramatic decline in transportation activity which will erase at least a decade of demand growth.  
  • Saudi Arabia is reported to be considering output cuts even before a 9.7 million barrels per day deal it had struck with Russia to cut production takes effect from May.   
  • Still, merely closing the tap a notch or two is not going to redress the oversupply in the market at a time when the ‘Great Lockdown’ has destroyed demand on an unprecedented scale.   
  • India has prudently been using the sharp fall in both crude prices and domestic demand to accelerate the build-up of its strategic reserve.  
  • While the sliding oil prices would help significantly pare India’s energy import bill, a protracted demand drought would end up hurting the government’s tax revenues severely, especially at a time when it badly needs every additional rupee it can garner.   
  • After the lockdown, the Centre ought to consider using this opportunity to cut retail fuel prices sharply by foregoing some excise revenue for a while in order to tease back momentum into the wider economy.  
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