Oil prices hit their highest levels since July 2015 recently.
Brent futures, the international benchmark for oil prices went up, indicating a rise of 45% in less than five months.
What are the causes?
OPEC - The Organization of the Petroleum Exporting Countries specified restrictions in production a few years back.
This seems to have had the desired effect of pushing prices back up from the dip in oil prices in recent years.
Saudi Arabia - Saudi heir's recent anti-corruption crackdown led to many high-profile arrests of powerful princes and officials.
The uncertainty about what it could mean for the stability of Saudi Arabia, the world’s largest oil producer, is pushing prices up.
Demand - With global growth looking better than before, the demand outlook is relatively stronger.
What are the possible implications?
The price rise is witnessed at a time when India is facing a slowdown in the economic growth.
The recent trend in oil prices is expected to reflect in many sectors of the economy.
Oil marketing - The first ones to get impacted would be the oil marketing companies (OMCs) and airlines.
These have limited power to pass on the cost of higher crude oil prices.
However, government may ask the public sector oil-major to shoulder some burden of higher oil prices, despite the dismantling of administered pricing mechanism.
Indiustries - Input costs are likely to rise as a follow up to rising oil prices.
Additionally, fuel and transportation costs are bound to increase across industries with rise in fuel prices.
Companies for whom crude or its derivatives are major inputs/costs are expected to see pressure on the demand as well as on profit margins.
These include sectors such as refining, airline, paints, tyres, footwear, lubricants, cement, logistics, construction materials and chemicals.
Thus, the ability of companies to sustain profitability will depend on their capacity to take viable price hikes.
Fiscal - A rising import bill of the government due to high oil prices could put downward pressure on the rupee.
While a weak rupee would benefit export-oriented players and the IT industry, it will hurt ones who import a major part of their raw materials.
Persistent rise in prices can also lead to rise in current account deficit (CAD).
These shifts in fiscal positions could weigh on inflation and rupee, and hence on interest rates, further impacting the private sector investment.
Besides, the high probability for further price rise could probably lead to money moving out of equities into safer havens like gold and US dollar.
Also, Indian equity market needs to digest the far-reaching implications of the grave geopolitical developments unfolding in West Asia.
What lies ahead?
Globally, the future course of oil prices depends to an extent on the dynamics of the shale oil market in the United States.
These technological improvements and increased efficiencies in the oil sector would decide the future course in oil prices.
For India, efforts like temporary subsidy will come at a serious cost to public finances and fiscal consolidation targets.
The challenge lies in balancing the stability in domestic oil pricing and fiscal prudence.
