Global oil prices, on a slippery slope through 2015, have seen a fresh leg of declines on a flurry of bearish news. Global Brent crude oil prices sank to an 11-year low of $36.05 a barrel on Monday triggered by high US oil inventories. But fundamental factors have been aggravating oil’s slide as well. Even as slow global growth is set to trim oil demand through 2016, the producing nations have been unable to adhere to any kind of production discipline that can alleviate the supply glut. Earlier this month, the OPEC decided to continue with its pump-and-dump policies, designed to chase other producers out of the market. The US last week decided to lift its 40-year-old export ban on oil, while Iran is preparing to ramp up output with the lifting of sanctions next year. No wonder then, that forecasters such as Goldman Sachs and CLSA are now laying their bets on oil at $20.
India obviously has much to gain from the global oil rout. The fall in oil prices has been instrumental in curbing the country’s import bill and keeping a check on its Current Account Deficit despite the poor show on the export front. The ₹2.2 lakh crore that India saved on its oil imports in April-November 2015 has helped the rupee hold fort during the recent global volatility. Then, with the Centre appropriating a lion’s share of the oil price savings through excise duty hikes, it has won additional headroom on meeting the fiscal deficit target for the year. The bonanza from cheaper oil will certainly come in handy to fund the extra expenditure on the Seventh Pay Commission and the recapitalisation of public sector banks, amid serious revenue shortfalls on disinvestment and direct taxes.
The recent bearish forecasts for oil, however, should not lead Indian policymakers to take cheap oil for granted. History suggests that global oil markets can swing from glut to deficit in the blink of an eye. It is naïve to believe that global oil prices respond to fundamental factors alone; sky-high oil prices from 2008 to 2011 were clearly driven more by speculation. It is, therefore, critical that the Centre treats the recent oil collapse as a limited window of opportunity for it to set its energy policies in order and capture sustainable gains for the fisc. The International Energy Agency recently predicted that India, as a prolific consumer, will hold the key to the fortunes of the global oil market over the next two decades, putting it in a unique bargaining position vis-à-vis global oil producers. It is good to see the Centre re-open supply negotiations with the OPEC, but efforts must be made to diversify the sourcing options in future. Encouraging state-owned oil giants to explore overseas acquisitions and expediting the build-up of strategic oil reserves will also go a long way in ensuring that there are lasting gains from this global oil rout.