Crude on boil: How does it impact the economy?

Crude oil also known as the “Black Gold” has always been a major driver in the world economy. Its price swings have the power to shake up the financial system, affect regular consumers, and even have an impact on international policy.

Crude oil prices have always been sensitive to world affairs; The prices for Crude oil have been rising due to various factors, such as the Russia - Ukraine war, Saudi Arabia production cuts, and now the Israel - Palestine war.

Since the Israel - Palestine war started in October, “Brent crude oil” prices have risen more than 9 %, peaking at $92.38 / barrel.

When oil prices soar, you may feel it at the fueling station, but that’s just one part of the story, let's take a deep dive into how this affects other aspects of the economy:

Direct consequences on the economy:

⦁ Inflation: The effect of rising oil prices is an increase in overall inflation in the economy, leading to a rise in production costs as many manufacturing inputs are oil-related such as plastics, chemicals, and some synthetic materials. Thus resulting in increased prices of products for the average consumer.

⦁ Consumer Spending: Consumer spending habits get affected because of Increases in fuel prices, and reductions in discretionary spending.

⦁ Transportation Sector: The obvious effects are on the transportation sector, that is industries heavily reliant on fuel such as airlines, shipping, and trucking resulting in increased operating costs in turn affecting the prices of products in the economy.

Indirect consequences on the economy:

⦁ Business Costs: These direct consequences, in turn, lead to a rise in production costs and transportation costs for manufacturers. Then to recover these costs, manufacturers have to increase their product prices, which affects their sales.

⦁ Government Policies: When crude oil prices rise, the government would likely give tax breaks in order to regulate prices, release fuel reserves, key sectoral subsidies, negotiations, and agreements with oil-producing countries.

India’s take on Crude Boil:

India is a net importer of crude oil, covering approximately 85 percent of its crude oil needs through imports. India has been able to maintain macroeconomic stability despite rising crude oil prices; mainly due to discounted imports of oil from Russia. Rising crude prices also negatively impact the current account deficit, According to analysts, every $10 rise in Brent crude prices widens India's CAD by 0.5%.

But rising crude oil prices also have a positive impact, increase in Renewable resources, and technological innovations such as electric and hydrogen vehicles.

Do you think India is en route to achieving its net zero carbon emissions by 2070?

Thank you.

Regards,

Atharva Mahadik,

Kautilya, IBS Mumbai.