Oil’s rout: on fall in prices (The Hindu)

Mains Paper 3: Economy
Prelims level:OPEC countries
Mains level: Impact of decreasing oil prices in global economy

Context:

• Global markets, already teetering from the impact of the coronavirus, received a jolt over the weekend as Saudi Arabia cut oil prices and declared its intention to increase output well beyond what the oil market can absorb currently.
• The Saudi reaction followed the Organisation of the Petroleum Exporting Countries (OPEC) cartel and Russia, the largest non-OPEC producer, failing to reach an agreement to deepen existing production cuts to cope with the falling demand.
• Oil prices crashed overnight by almost a third to $31 a barrel consequent to the kingdom slashing prices and announcing its intent to increase output.
• The oil market is now set to witness the rare conjunction of a demand and a supply shock which is bad news for prices.

Impact of COVID-19 in oil demand:

• Fears of a fall in demand following the outbreak of COVID-19 had already depressed oil prices in the last couple of weeks.
• China, a major importer, ................................

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Impact on the consuming countries:

• Fall in prices is good news for major consumers such as India and China which depend on imports for a major part of their oil needs.
• It may be bad news for the big oil companies and the smaller shale oil players who are highly leveraged.
• A collapse of these shale oil producers may set off defaults in the bond markets, setting off its own non-virtuous spiral starting with the U.S. markets.
• With stock and bond markets already in turmoil, the price war now set off in oil is only going to make the markets more volatile and murkier.
• For India though, the sharp dip in oil prices is good news, for now.
• This will reduce the oil import bill at a time when merchandise exports are likely to suffer due to the freeze in the developed economies.

Maintaining current account deficit:

• This will keep the current account deficit balanced.
• The fall in fuel prices will ...........................

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Conclusion:

• It is quite possible that the government may step in to grab a slice of the windfall from falling prices, through higher excise duties to compensate for the loss from disinvestment proceeds.
• Any such decision is unlikely to go down well with India’s consumer middle class.

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Prelims Questions:

Q.1) With reference to the internet shutdown in India, consider the following statements:
1. Under the Indian Telegraph Act of 1885, only the Home Secretary of the central or the state government can pass orders to enforce an internet shutdown in any area.
2. The order must include the detailed reasons for the shutdown and must be sent to a review committee the next day.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: ...........................

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Mains Questions:
Q.1) Describe the positive impacts on India by cutting the global oil prices. What are the reasons behind price cut by the oil producing countries?