Rising Oil Prices: Reasons and Impact

Photo by Jan-Rune Smenes Reite from Pexels

As consumers, the sudden increase in gas and diesel prices is putting a dent in our wallets. The government appears to have little control over the dramatic increase in fuel prices over the last few months, even as the COVID-19 pandemic situation improves globally.

From a low of USD 16 per barrel on April 22, 2020, the price of Brent crude oil has been steadily increasing since then, and has now surpassed the USD 80 per barrel barrier. The increase in oil prices has resulted in petrol and diesel prices in India reaching all-time highs.

This is obviously seen on the stock market, with mounting fears of inflation, currency depreciation, and increased input costs for businesses across all industries. However, India recovered somewhat on Thursday as global markets showed signs of life.

Present Scenario

On April 22, last year, Brent crude oil fell to a low of USD 16 per barrel. Since the start of 2021, it has increased nearly 58 percent, from approximately USD 51.8 per barrel to approximately USD 81 at Wednesday’s close.

The increase has been rapid over the last six weeks, beginning on August 20 at USD 65 per barrel. Analysts believe that fuel prices are approaching their intermediate peak of USD 86 per barrel.

At this level, some cooling is expected, even as the wider trend continues to rise.

Reasons

Global demand for crude oil soared in 2021 as the world economy recovered from COVID-19, resulting in a dramatic increase in prices. Another factor contributing to the significant increase in worldwide oil prices is the supply constraints imposed by the OPEC+ member nations.

As a result of the epidemic, these oil-producing economies have continued to expand production slowly, resulting in an increase in oil and gas prices.

There is currently a gas scarcity in Europe and Asia, which has increased demand for oil for power generation. In India, petrol and diesel prices are set to a 15-day rolling average of these fuels’ international pricing.

High taxes levied by the central and state governments have also contributed to India’s much higher retail fuel prices.

Photo by Jan-Rune Smenes Reite from Pexels

Impact

Due to the fact that India imports a large share of its fuel requirements, it need more money to purchase crude oil, reducing liquidity.

The rupee is edging closer to Rs 75 per dollar, implying that imported items may become more expensive.

As the supply chain for coal has dwindled, demand for oil on the worldwide market has soared.

The import of Brent crude oil accounts for almost 20% of India’s total import expenditure.

The petroleum import bill increased from USD 8.5 billion in the second quarter of 2020 to USD 24.7 billion in the second quarter of 2021.

Increased fuel costs could trigger a spike in inflation, compelling the RBI to pursue liquidity tightening measures followed by rate hikes.

A rise in crude oil prices translates into an increase in the cost of manufacturing and transportation for a variety of items.

A spike in crude prices typically results in an increase in India’s expenditure and a negative impact on the fiscal imbalance.

Increased prices have an effect on the current account deficit, which occurs when the value of imported goods and services exceeds the value of exported goods and services.

A dramatic increase in the price of Brent crude oil might also cause short-term panic in the equity markets.

Oil futures fell negative last year amid the pandemic’s peak, and stock markets bottomed out.

Since then, global markets have been on a tear, soaring in lockstep with international oil prices.

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