Crude Oil Price discussions

The crude oil prices have been the topic of conversation in Indian households and the hot topic for debates on everyday prime time. The fluctuations in the prices of crude oil have been the reason for the inflated household budget, increased fuel prices and a general increase in the prices of the commodities as crude oil is used as a raw material in several commodities. 

Like every other commodity, the price is also affected by the market forces of demand and supply. However, one should take note of the other factors that influence the price of crude oil. The influence of OPEC countries, which are known to be the producers of crude oil, affects the price in the world market acutely. 

The article explores the price of crude oil in recent times and the factors affecting the same.

Price Fluctuations in the Crude Oil in Recent Period

In the recent period of time, the world has moved from a global pandemic to a probable world war that has started between Russia and Ukraine. As the markets have become increasingly globalised, the effects of war in the European continent will be seen in the whole world given that Russia is also a prime exporter of oil reserves. The oil prices started shooting up on day 1 and the restrictions being imposed on Russia which is the second-largest exporter of crude oil in the world are not helping the situation. At the time of writing the article, the price of crude oil in India (per barrel) was $109.14. The price of the crude oil barrel has remained higher than $100 per barrel for quite some days now, given the international tension brewing up. It is being forecasted that soon this price will cross the threshold of $147.50 a barrel and will become the highest price that crude oil barrels have reached in history. According to the official data, the prices of crude oil has increased by 15.63% in January 2022. The government had forecasted that the prices will increase by $70-$75 per barrel, however, the prices have increased by double the amount forecasted. 

Factors Affecting the Price of Crude Oil

There are several factors that affect the price of crude oil. The major ones are as follows:

1. Demand and Supply: Just like every other commodity in the market, crude oil is affected by the forces of demand and supply. The general law derives a negative relationship between prices and the demand of the commodity. When the demand for crude oil transcends the available supply of the same, the prices soar high to move the market back into equilibrium. In the pandemic, when the entire world was in lockdown, the commercial consumption of crude oil fell and the prices were normal for a while. However, as soon as the countries returned to normal, the demand soared back again and so did the price.
2. Influence of OPEC: One of the major factors affecting the price of crude oil apart from the market forces is the influence of the producer countries OPEC.  the countries control the supply of crude oil from time to time in order to influence the prices.
3. Political Upheaval: The price of crude oil is also influenced by the political instability in the countries where the product is in abundance. Example: analyse the impact of war in Russia and the Middle East.
4. Natural Disasters: The production and supply of crude oil can also get impacted by the advent of natural disasters in the region of production/supply. The impact caused will eventually influence the prices of crude oil.
5. Production and Storage Costs: The storage and production costs can affect the prices acutely. Once the world exhausts the supply of cheap oil, the prices will rise at an increasing rate.

Influence of OPEC

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization that controls approximately 40% of oil production in the world. Historically, the members of the OPEC countries have controlled the supply of crude oil several times to influence the price of crude oil. The OPEC countries control 60% of the total crude oil traded internationally. 

The OPEC countries usually control the supply when the international prices are below the level of their expectations. Generally, all the member countries decide the level of production that they will undertake collectively. Saudi Arabia and Russia are the two major players in the oil field and the common countries make supply cuts in order to boost their revenues.

Impact of High Crude Oil Prices on Economy

The Indian economy is highly dependent on oil imports for its industries. 86% of the country’s requirements are met through oil imports. According to the official data released by RBI, India has a current account deficit of $9.6 billion in the second quarter of 2021-22. The higher crude oil prices will affect the already widening trade deficit and will add inflationary pressure on the economy, which still hasn’t recovered from the aftermath of the pandemic. The forecasted price of crude oil as $120 per barrel will add an estimated $60 billion to the trade deficit of the country.

Apart from the widening trade deficit, crude oil is the major raw material in several domestic commodities. An increase in the price of crude oil will add to the increased price of the household commodities which will further add pressure on the monthly budget of the people.  

Conclusion

The fluctuation in the price of crude oil is a phenomenon that affects each and every country in the world. Apart from the market forces of demand and supply, there are several other factors that affect crude oil prices.