Oil prices are currently hovering at less than $45 per barrel. A barrel is equal to 42 gallons or 159 liters. This decline in oil prices that started in 2014 has continued in 2015 too. This is in sharp contrast to 2013 when oil prices were more than $100 per barrel.
One reason that oil prices have come down so sharply in the past one year is the economic slowdown in China. China has been the engine of global economic growth in the past three decades. Average annual Gross Domestic Product (GDP) growth rate posted by China in this period averaged around 10% annually. In 2015 this average annual growth rate of the world’s second largest economy is likely to come down to around 7%. Lower economic growth in China means lower demand for oil.
The second reason for decline in oil prices is the increase in supply of oil and shale gas. The global supply of oil has increased because of deep-sea oil drilling. This deep-sea oil drilling has been enabled due to technological innovations. A more important reason is shale gas. Shale gas is natural gas trapped in shale rocks. A technology called ‘hydraulic fracking’ has made it possible to release this natural gas trapped in shale rocks. Due to hydraulic fracking supply of natural gas in United States of America has increased so much that America doesn’t need to import oil for meeting its energy needs any more. Natural gas is a substitute of oil.
The decline in oil prices is a positive development for India. India is dependent on imports for more than 80% of its oil needs. It usually pays for this imported oil in US dollars. Most international trade takes place in dollars. Lower oil prices mean India will have to make lower dollar payments. This will also improve its trade deficit situation. Trade deficit is the difference between value of imports and value of exports of a country. When imports exceed exports, it is a situation of trade deficit. When exports exceed imports, it is a situation of trade surplus.
Many industries also stand to gain from lower prices of oil. The airline industry is one such industry. Oil or fuel costs constitute the biggest percentage of operating costs of an airline company. Oil marketing companies in India recently reduced the price of aviation turbine fuel (ATF) by 11% due to decline in global oil prices.
The automobile manufacturing industry also stand to gain as demand for automobiles will increase if oil prices stay depressed in the medium and long term. People will use and buy more automobiles if oil prices are lower. Oil marketing companies and refining companies also stand to gain due to lower prices. On the other hand oil producing companies such as Oil & Natural Gas Corporation Ltd (ONGC), BP, Cairn etc stand to lose because of the lower oil prices.