It’s a jackpot: At $35/barrel of crude, govt will save whopping $47 billion in import bill

The oil market is in a tailspin. Brent crude prices have cracked to $35/barrel today, down 23 per cent from Friday’s close, following Saudi Arabia starting a price war with Russia by dropping its selling prices sharply.

Goldman Sachs is now predicting the price to fall to $20/barrel if the war between OPEC members exacerbates and it fails to reach a deal on production cuts.

According to a Reuters report, Saudi Arabia is preparing to increase its production above the 10-million barrels per day mark; the current production is 9.7 million barrels per day and there is capacity to ramp it up to 12.5 million barrels per day.

Oil prices have been falling following the slump in demand due to the shutdown in China post the coronavirus outbreak.

The drop in oil prices, however, comes as good news for India that has been struggling to manage its current account deficit.

The cost of the Indian basket of crude, which averaged $71/barrel in April last year, dropped to $59.7/barrel in October and further to $51.03/barrel last week. The current drop in prices, if factored in, will see costs coming down further.

India’s crude oil imports have been rising by the year, adding to the government’s already stressed fiscal position.

In 2018-19, the country imported 226.498 million tonnes of crude oil. Assuming the same quantity of imports for 2020-21, at $50/barrel, the import bill would be $83 billion — lower than the $111.9-billion in 2018-19 and the estimated $105 billion for 2019-20. At the current price of $35/barrel, the import bill will be $58 billion, leading to a whopping $47-billion saving for the government compared to 2019-20.

Now, that’s a tidy sum for the government to make good its deficit in the current account.

Even if the current level of $35/barrel does not sustain, and it settles at $40-45/barrel, that will be good news. It will reduce prices at the fuel pump for consumers. The Reserve Bank of India may be seen willing to cut rates as inflation may slide.

Help cool down inflation

The drop in crude prices will help cool down the rising consumer price inflation. In January, the CPI was at 7.52 per cent (YoY), the highest since May 2014, according to data released by the Ministry of Statistics and Programme Implementation.

Fuel inflation in January was 3.58 per cent, up from 0.63 per cent in December. Now, with crude prices dropping sharply, it will lower the overall inflation, bringing respite to consumers.