Crude oil prices have once again exceeded the key $100-per-barrel level. The international benchmark, that is, the Brent Crude Oil Price Index, surpassed the $100 barrier due to tensions in West Asia and fears of any disruption to the oil supply chain.
Brent Crude was trading at around $101.21 per barrel on September 9th. This rise is triggering concerns regarding fuel prices, inflation, and the cost of importing oil to India.
This is very significant, especially for India since the country depends on the importation of crude oil for its energy needs. If the prices of oil stay high for a long period of time in the international market, they can even affect the economy.
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| Image Credit: The Indian Express |
Why are crude oil prices rising?
The recent increase in the price of crude oil is greatly related to the increased hostility in West Asia. The recent attacks by Iran against the U.S., together with attacks against oil transportation, have created security threats in some major energy routes.
The Strait of Hormuz is particularly important to global energy markets because a significant amount of oil normally passes through the waterway. Any disruption in the region can raise concerns about future supplies and push prices higher.
There has been an increase in Brent Crude since early August, although it remains below the previous peak for the year, which stood at $126 per barrel in April. The uncertainties surrounding the availability of oil have contributed to the rise in oil prices. Prices could fall if any tensions were resolved in the future.
Why is $100 oil a concern for India?
India is one of the largest oil consumers in the world and relies upon imports to meet more than 88 per cent of the country’s crude oil needs. Therefore, India is extremely vulnerable to any fluctuations in international oil prices.
When international crude prices increase, the Indian oil refineries have to pay more for imported crude oil. If prices continue to stay high, it could cause an increase in the import cost of oil in India.
India's crude oil import bill had already risen significantly during April-July, reaching around $63.4 billion compared with $40.5 billion during the same period a year earlier.
High oil prices may also cause the rupee to depreciate due to increased foreign exchange requirements by the country to fund its energy imports. The weaker rupee will, in turn, increase the cost of imported oil.
What about petrol and diesel prices?
A rise in international crude prices does not automatically mean an immediate increase in petrol and diesel prices in India.
Domestic fuel prices have not moved in line with the latest jump in crude, putting pressure on oil marketing companies. The Indian Express reported that public-sector fuel retailers were estimated to be losing around ₹5 per litre on petrol and more than ₹20 per litre on diesel as crude prices moved above $100.
In case crude prices remain high for some time, there is more chance that fuel retailers might be under even more pressure. But an increase in the cost of crude does not automatically mean there will be an immediate increase in fuel costs since domestic prices depend on other factors as well.
How could higher oil prices affect inflation?
The impact of crude oil on India goes beyond petrol and diesel. Oil is an important input for transportation, manufacturing, and logistics. When energy costs increase, businesses can face higher operating expenses, which may eventually affect the prices of goods and services.
That is the reason why the rising trend of crude oil may create worries about crude oil and inflation in India. An increase in oil prices can also lead to problems for India’s balance of payments and the rupee. When the currency depreciates, with crude oil prices staying high, import costs can increase.
From the consumer’s point of view, what matters is not just that crude gets to $100, but that it stays there for so long.
What happens if crude stays above $100?
If the cost of Brent crude stays above $100 for some time, then India may suffer from increased import prices and pressures on fuel companies, inflation, and the rupee. But the effect of that will be hugely dependent on the duration of the high prices. If the geopolitical situation eases and the world faces fewer supply issues, then the prices may fall back again.
For now, the situation remains closely linked to developments in West Asia and global oil supplies.
Conclusion
The rise in the crude oil price above $100 per barrel has created a fresh challenge for India. As a major oil importer, the country remains vulnerable to sharp movements in international energy prices. Domestic petrol and diesel prices have not fully reflected the latest global surge, but prolonged high crude prices could increase pressure on oil companies and India's import bill.
If the situation continues, India could also face additional inflationary pressure and pressure on the rupee. The movement of Brent crude in the coming weeks will therefore be important for both consumers and the wider Indian economy.
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Author - Saurabh