That Brent crude oil prices have slid down by nearly 60% in the last two quarters alone (the current selling price is under $50 per barrel), and still continue to decrease is a cause for celebration for many, particularly those thriving on the macroeconomic level. However, many believe that his happiness is short lived and that this continuous decrease would have far greater implications on international markets and businesses.
The pros of reduced crude oil prices
India is definitely one of the few countries that would benefit from reduced crude oil prices. The areas in which these benefits can be enjoyed are inflation rates that would lower automatically, budget and fiscal management with reduced interests, and foreign exchange, which would experience plenty of savings. The other pros reduced crude oil prices offer include increased purchasing power, policy cut rates, fiscal consolidation and current account stability to name a few.
The cons of reduced crude oil prices
The continuous slide can however, can have several implications on international businesses and foreign investments. Oil exploration and production activities account for over $2 trillion bank funding, thus forcing many projects to face the brunt of falling crude oil prices. Faced with viability issues, many projects can either face production cuts or declare bankruptcy. As such, many experts believe that decreasing crude oil prices can lead to a sharp increase in sovereign defaults and bankruptcies in the coming years. The global market would also be affected as a result of this, creating a highly volatile environment for currency and country specific news.
What is in it for India?
India will surely benefit from reduced crude oil prices. However, continuous decrease will prompt currency volatility, which would inhibit global exports by slowing down the global economy. India also stands a chance to experience reduced FDI due to this, a factor that would weaken the rupee and affect the country’s foreign debt services. Many Indian companies having direct business relations with foreign oil companies can be affected by these unviable prices. There are many other Indian companies specializing on the manufacture of synthetic crude oil derivatives that rely on high crude oil prices for their businesses. These companies will be forced to sell their products at current market rates at the cost of high priced inventories.
To sum it up, the continuous slide of crude oil prices can offer a relief for India, albeit on a temporary basis. Businesses as well as investors would need to plan selectively, taking into account the long term perspective of things.
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Reducing crude oil prices can offer a temporary relief for India. However, a continuous decrease can have several implications for the country’s economy in the long run. Hence, it is considered to plan carefully taking the long term perspective into account.