Table of Contents
What has happened?
- Oil prices climbed above $80 a barrel on Tuesday, hitting their highest level in three years as the pound slumped.
- Brent crude, the international benchmark, rose to as much as $80.69 on the day, the most since October 2018.
- Prices have been rising for seven consecutive days on the back of the energy crisis in Europe.
- The recent spike in global crude oil prices above the $80-per-barrel mark led to a dip in key indices in the stock market,
- As concerns rose over the impact on inflation, currency and input cost for companies across sectors.
Why oil prices are rising?
- Since hitting a low of $16 per barrel on April 22 last year, the price of Brent crude oil has been rising steadily.
- Since the beginning of the year, it has risen nearly 58% from about $51.8 per barrel to about $81 at close on Wednesday.
- The rise has been sharp over the last six weeks, from $65 per barrel on August 20.
- According to analysts, prices are nearing their intermediate top level of $86 per barrel, around which some cooling off is expected even though the broader trend remains rising.
- Crude prices have risen sharply in 2021 on the back of a recovery in global demand as the world economy recovers from the pandemic.
- Supply restrictions maintained by the OPEC+ grouping , too, have kept international oil prices high.
- So far, these oil-producing economies have signalled only slow production increases, which is leading to a rise in gas prices as well.
- A shortage of gas in Europe and Asia has boosted demand for oil for power generation.
- The rise in crude prices has contributed to petrol and diesel prices hitting all-time highs in India.
- Prices of petrol and diesel in India are pegged to a 15-day rolling average of the international prices of these fuels.
- High taxes by the central and state governments too have contributed to retail prices being far higher.
Impact on equity market?
- While a sharp surge in oil prices can create short-term panic in the equity markets, historical precedents show that equity markets often bottom out alongside a bottoming out of oil prices.
- When oil futures turned negative last year at the peak of the pandemic, stock markets bottomed out, but since then they have been on a rising spree in line with surging oil prices.
- Analysts point out that increasing oil prices reflect growing demand in the economy, and equities often deliver more than the expected inflation that the oil surge may lead to.
- For equity investors, they can increase their exposure to upstream oil companies, which benefit from rising prices.
- In sectors where oil is a major cost component, a negative reaction on returns can be expected.
Impact on currency
- Rising crude prices tend to depress the rupee, as India being a major importer of oil needs more dollars to buy the same amount of crude.
- The rupee has already started slipping and is moving towards the $ 75 per dollar mark.
- At this stage this may be a welcome development as it would aid exports, though imported goods will tend to be more expensive.
Inflation & Govt finances
- Crude import accounts for nearly 20% of India’s import bill.
- The fuel import bill jumped from $8.5 billion for the quarter ended June 2020 to $24.7 billion for the June quarter 2021.
- An increase in crude prices means an increase in the cost of producing and transporting goods.
- It thus adds to inflation; economists say an increase of $10/barrel in crude oil prices could raise inflation by 10 basis points.
- A surge in crude prices tends to increase India’s expenditure and adversely affects the fiscal deficit.
Q) When an oil well is drilled through rocks, which of the following comes out first?
- Coal gas
- Marsh gas
- Natural gas
- Carbon dioxide
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