Crude oil price dynamics and impact
- March 9, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Crude oil price dynamics and impact
Subject : Economy
Section :Inflation
Context:
Russia is the third largest producer of oil in the world and, more importantly, the world’s largest exporter of oil and gas and the second largest exporter of crude oil after Saudi Arabia. So, disruption of supplies due to the ongoing war and Black sea blockage is bound to roil energy markets.
Concept :
Impact-
- Rise in import bill and current account deficit-leading depreciation of domestic currency.
- Imported inflation and reversal of easy monetary policy
- Oil and natural gas as a universal intermediate enters in multiple ways into the costs of commodities, making oil price increases a driver of overall non core-inflation
- Stock and commodity market crash leading to large scale capital outflow.
- Supply shortages leading to stagflation as it being the basic raw material to various industries and transportation services.
- The policy trilemma refers to the trade-offs a government faces when deciding international monetary policy. In particular, the policy trilemma contends that it is not possible to have all three objectives at the same time, but has to choose two from the following three options:
- Free movement of capital
- Independent (autonomous) monetary policy
- Fixed (managed) exchange rates
Why were oil prices rising even before the Ukraine crisis?
The main reason is global demand was already outstripping supply. Reasons for low supply
- Russia has been holding back from providing additional supplies of natural gas to Europe. As the price of gas shot up, so did the price of oil as consumers shifted from gas to oil and coal
- Continued underinvestment in oil and gas exploration because of the “public and regulatory aversion” to fossil fuels.
- There is very limited “spare capacity” within the OPEC (Organization of the Petroleum Exporting Countries).
Russia’s share in global exports is around 12%. “Russia supplies close to 5 million barrels a day to the global market and that is not an insignificant amount and a ban will immediately tighten the market further.
Why Venezuela cannot fill the gap?
Venezuela has the world’s largest oil reserves but producing oil requires more than just reserves. The country’s oil-producing apparatus is in disrepair partly due to the government’s mismanagement but also because of harsh US sanctions. Oil-producing companies are in debt and most don’t even have good quality drilling equipment