Statsguru: Six charts show higher crude prices tend to push up inflation

Volatility in crude oil prices over an unexpected production cut has brought back the focus on India’s vulnerabilities as a large importer.

The Organization of the Petroleum Exporting Countries (OPEC) and other oil producers including Russia (collectively called OPEC+) said they would produce 1.16 million fewer barrels a day. Crude oil prices jumped above $85 per barrel after the announcement (chart 1).

 

International crude oil prices, already volatile due to the invasion of Ukraine and the ensuing sanctions on Russia, had reached as high as $133.89 per barrel in March last year. India has been facing a higher oil import bill after the pandemic despite importing lower quantities of crude. The quantity of crude that India imported was 6 per cent lower in 2021-22 at 212 million tonnes compared to 2018-19. The import bill, however, was around 8 per cent higher at $120.7 billion. It had crossed $146 billion as of late-March in 2022-23 (chart 2).  

India’s oil demand is forecast to grow more from the pre-pandemic levels than other large economies in 2023. It is estimated to increase 8 per cent in 2023, second only to China’s 12.7 per cent jump among key peers. The US, Europe and Organization for Economic Cooperation and Development (OECD) countries are forecast to have lower demand in 2023 than 2019 (chart 3).

Higher crude prices tend to push up inflation. India’s retail inflation is already above the Reserve Bank of India’s tolerance band (chart 4).

A high import dependency for the country and a rise in international prices could mean worsening of the current account deficit (CAD). India’s CAD as of December 2023 had narrowed to $18.2 billion or 2.2 per cent of the country’s gross domestic product from $30.9 billion in the previous quarter amid lower imports (chart 5).

 

Weaker global economic data, such as the recent tepid jobs data from the US, may help. Any sustained uptrend can also have an affect on government finances. Nearly a quarter of the central government’s revenues come from petroleum sector levies (chart 6).