Last week, United States President Donald Trump withdrew from the landmark agreement with Iran. The move roiled the international markets, with global crude oil prices rising to $77 per barrel, against $48 per barrel in June 2017 (Chart 1). The decision is likely to worsen the demand-supply dynamics of the oil market.
World oil demand is expected to rise by 1.63 million barrels per day (mb/d), reaching 98.7 mb/d in 2018 (Chart 2).
On the supply side, while non-OPEC countries are expected to boost supply by 1.71 mb/d to 59.61 mb/d in 2018 (Chart 3), supply by OPEC is expected to remain roughly at current levels.
Within the Organisation of Petroleum Exporting Countries (OPEC), Iran was earlier projected to supply roughly 3.8 mb/d in 2018 (Chart 4). But with sanctions now being imposed, this disruption in supply is likely to lead to even more price uncertainty.
Oil-importing countries are likely to be badly hit. As seen in Chart 5, India’s crude oil basket has inched upwards to $75 per barrel on May 9 from $50.5 in May last year.
The combination of higher crude oil prices and a depreciating rupee is likely to add to India’s import bill (Chart 6), worsening the current account deficit. Economists now expect the current account deficit to rise to 2.4 per cent of GDP in FY19.
Higher oil prices also pose a dilemma for governments. In order to limit the rise in retail prices, the government might be forced to cut the excise duty on fuels, putting pressure on its revenue targets. To give some perspective, put together, the Central and state governments earned around Rs 5.2 trillion from taxes on oil in 2016-17. In 2017-18, collections stood at Rs 3.8 million till December.
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