Reasons and Implications of Rising Oil Prices

Why in news?

The international benchmark for oil prices crossed $80 a barrel touching the highest level since 2014.

What are the concerns with rising oil prices?

• Brent, the international benchmark for oil pricesis almost three times the cost in early 2016 when it was $29 a barrel.
• The trend may continue in the coming weeks and months, according to most reporting on oil.
• Rising oil prices could cause significant inflation, dampen economic growth and alter geopolitics in multiple ways.

What are the reasons behind increasing oil prices?

• American Factor -U.S. Administration’s decision to withdraw the country from the Iran nuclear deal.
• Sectors such as financial and banking, underwriting services, insurance, shipping and shipbuilding and port operation will come under US sanctions all of these will influence oil trade.
• US administration is also threatening unstable Venezuelan economy which is dependent on petroleum exports with new sanctions.
• Russian Factor -Oil prices are also driven up by coordinated action by Russia and Saudi Arabia to keep supply on a tight leash.
• The heightened instability in West Asia in the form of Saudi Arabia-Iran rivalry and the looming possibility of new military conflicts add to this.

What is the reaction for US decision among global economies?

• European countries, Russia and China, who are part of the Iran deal, have said they will not participate in American sanctions.
• It is unclear how far European companies could withstand American pressure and continue trade with Iran.
• French oil company Total has announced that it will halt a natural gas development project in Iran unless it receives a waiver from the U.S. government.
• China will continue to buy from Iran and so will India, even if in reduced quantities.

What will be the implications of this?

• India imports significant quantities of oil from Venezuela and Iran.
• The full impact of re-imposition of sanctions on Iran will have a serious impact on Chabahar port in Iran which was built with Indian aid.
• Instability in oil prices could help America’s strategic rivals Russia and China.
• Russia could benefit from higher prices in the international market.
• China could get better deals in buying crude cheap from Iran as it could insulate the trade from secondary American sanctions.
• Higher oil prices could have mixed impact domestically in America due to increasing demands.

Source: The Hindu