Indo-Gulf Trade: Impact of Lower Oil Price and Future Opportunities

Indo-Gulf trade: Impact of lower oil price and future opportunities

As the price of importing a barrel of crude oil continue to fall down, Indian economy is getting increasingly dependent on Gulf countries to fulfil its rising demand of petroleum products. As a result, our government is not able to diversify its energy generating resources. Although the lowered oil prices has led to a significant reduction in costs of oil purchase, yet this trend could cause harm in the long run. Indian labor workforce working for petroleum companies in the Gulf nations have a higher chance of losing their jobs with the falling production costs.

In present times, all the major economies of the world are becoming self-sufficient to meet their need of crude oil. India, however, is keen on increasing oil imports. This is a great time for venturing into renewable sources of energy and experimentation. With no oil crisis at this time, Indian Government has an opportunity to direct their funds into various research projects based on cleaner forms of energy generation.

Lowered oil prices will give a chance to other industries who were striving hard to enter into this business, but were not able to do so because of lack of political support. With the price of a barrel of oil falling to about $45, big Indian oil giants are not able to make enough profits. Consequently, they are forced to concentrate on other ventures. It makes way for budding local players to enter the arena. Industries which require oil as an essential ingredient in manufacturing certain products would be willing to capitalize on this opportunity. The savings obtained from low oil prices is being spent in giving free LPG connections to below poverty line (BPL) category families.

Saudi Arabia has emerged out to be the leader among the Gulf nations for oil production. It holds the largest reserves of the lowest production cost oil in the world. For them, the marginal cost of producing a barrel of oil won’t go beyond $10 for the next coming 20 years. It is essential that we should focus more on improving bilateral ties with such a stable economy. Rather, effective measures should be taken to strengthen Indo-Gulf trade relations.

Prime Minister’s visit to UAE, Saudi Arabia and the visits of Abu Dhabi Crown Prince, Qatar Crown Prince will surely go a long way in enhancing cooperation in the energy sector, primarily focusing on strategic reserve. This would help us in building capacity within our country. India aims to change the nature of relationship with Gulf countries on energy from a buyer-seller one into one with equity partnership. Talking of Indo-Iraqi relations, Iraq's oil wealth and Iraq's need for Indian goods, services and personnel will remain key factors in Indo-Iraqi relations for many more years to come. For this reason, India cannot afford to be regarded as a staunch supporter of the continuing US violation of Iraqi sovereignty. Indian troops being sent to Iraq to strengthen them against continued violation by American military troops is a good move by the Indian government. This will not only bolster our relations with Iraq on the oil front but also many other avenues.

Lower oil price has resulted in benefits such as low tyre prices, low paint prices and significant fall in air ticket prices. For industries manufacturing carbon black, oil is an essential ingredient. They would highly benefit from lowered oil prices and the profits generated would percolate down to all the products making use of carbon black.

Lower crude oil prices have significantly reduced the expenditure for the Government, which led to the reduced current account deficit of the country. This is an excellent opportunity for the government to provide subsidies to struggling sectors, which in turn can boost the economic growth.

On the other side, one of the big risks associated with lowered oil price is market volatility, which could eventually affect foreign investment inflows in India, while oil projects could be shut down and oil exploration projects could be stopped. BJP government faces the challenge of working on longer-term solutions to its dependence on the commodity. It includes development of alternatives such as renewable energy sources as we talked above.

For the coming years, government needs to fix the rate of excise duty on oil prices. It should not go for abrupt increases. This would enable the government to achieve its fiscal deficit targets and help control the impact of international crude oil price movement on domestic users. Consequently, if they start rising again, the impact of inflation will be mitigated