War between Russia and Ukraine: How rising crude oil prices affect us in ways we don’t realise War between Russia and Ukraine: How rising crude oil prices affect us in ways we don’t realise

Crude oil

The Russian invasion of Ukraine is still going on. There has been a lot of discussion about rising crude oil prices and its impact among all of the strategic, geopolitical, and humanitarian concerns. The influence is felt by everyone, including you and Chadha ji in your neighborhood.

This problem has a lot of interconnected elements. At work, there’s a tangle of issues to contend with, and the lines between cause and effect are frequently muddled. Let’s have a look at some of the most basic ones.

PRICES OF CRUDE OIL

Why are global crude oil prices rising as a result of the conflict?

Crude oil prices have been climbing even as Russia’s President Vladimir Putin prepared to launch a special military campaign in Ukraine, a former Soviet republic backed by the US-led military alliance Nato (North Atlantic Treaty Organization).

The world worried that the conflict would lead to an embargo on Russian oil in the West. Even before the United States and the United Kingdom imposed sanctions on Russian oil and gas supplies, some nations had ceased purchases, while others went into panic purchasing mode. On March 7, oil prices hit a 14-year high of $140 per barrel. They’ve dipped since then, but just somewhat.

THE FUEL FOR RUSSIA

With rising oil costs, it’s natural to wonder why Russian fuel is important.

Russia is really the world’s third-largest oil production (behind the US and Saudi Arabia). It delivers 14 percent of global crude oil output, or 7-8 million barrels per day, to markets across the world. The US and UK embargoes, as well as some other pro-Ukraine countries’ refusal to import Russian petroleum, have exacerbated the problem. There was already a scarcity of goods.

WHY IS INDIA SO CONCERNED?

We have a good notion by now, but let’s answer it.

India is the world’s third-largest oil user, behind the United States and China, at 5.5 million barrels per day. The country’s oil demand is increasing at a rate of 4% each year.

According to this projection, India might consume roughly 7 million barrels of oil per day in a decade. India imports around 85% of its oil from about 40 nations, the majority of which come from the Middle East and the United States.

India imports 2% of its supplies from Russia, including oil, which it refines and transforms to petroleum products. So, rather than Russian oil, India is concerned about rising oil costs in general.

INDIA’S INFLATION

We’re concerned because there’s been an increase in mehangai, or inflation.

High oil prices or supply interruptions would result in more expensive gasoline and diesel for private car users, as well as higher transportation costs for critical commodities such as fruits, vegetables, and foodgrains. As a result, there will be more “mehangai.”

For the first time in seven months, retail inflation exceeded the upper limit of the Reserve Bank of India’s tolerance zone of 6% in January.

SLOWING OF THE ECONOMY

India’s concern stems from the country’s economic slowdown.

The majority of crude oil transaction is conducted in US dollars. This means that more dollars from India’s foreign exchange reserves will be spent on oil, and fewer dollars would be available for other imports.

Let’s chat about you now. You spend less on other necessities when you have to pay more on gasoline and diesel. However, due of the increase in inflation, you are also hesitant to spend. Demand for products and services falls as a result, and activities such as building, manufacturing, and imports stall.

Employers can hire fewer people. The economy as a whole suffers. This is horrible news, especially because key economic indices had been recovering since the Covid shock.

AN INCREASE IN OUR IMPACT

It has a direct influence on exports and, by implication, on us.

More than 100 nations import petroleum products from India. More over a third of India’s total exports are made up of these items. The rise in crude oil prices has also had an impact on this. An oil crisis will wreak havoc on sectors like petrochemicals and plastics, as well as electricity generation, and exacerbate the labour shortage.

GROWTH DATA THAT HAS BEEN INTERRUPTED

Economic growth metrics immediately reflect the impact. But how do they affect you?

According to India’s recent Economic Survey, the country would expand by 8-8.5 percent in fiscal year 2022-23, assuming oil prices maintain between $70 and $75 per barrel. In March, the Indian crude oil basket price averaged $114.6 per barrel, up sharply from $93.3 per barrel in February.

The price of crude oil may potentially break the previous high of $147.50 per barrel. In fact, Russia has warned that if the US and European countries totally restrict Russian oil imports, the price of crude oil may skyrocket to $300 per barrel.

So, let’s dissect these figures to discover what they signify. Because growth predictions have been revised downward, essential industries such as agriculture, services, and manufacturing will not perform as well as expected.

To put it another way, a smaller labour and less machinery will be required. The government’s ability to spend on infrastructure and other social initiatives will be limited. International organisations may award the country poor ratings if the government borrows too much to pay for all of this. This makes future borrowing more difficult. As a result, investment falls. This exacerbates the labour shortage.

EXPENDITURE AND REVENUE

About half of India’s excise tax (paid on items manufactured within the nation) goes to the federal government, thanks to oil. Taxes on the sale of gasoline and diesel are imposed by the states as well. Revenues will be reduced, limiting the government’s ability to spend on you.

THE CAD CONFUSION

Don’t be put off by one more abbreviation in your life. A current account deficit occurs when the entire value of goods and services imported by a nation exceeds the whole value of goods and services exported by that country.

Because of increasing oil prices, the rating agency ICRA has warned that India’s current account deficit (CAD) might increase to almost 3% of GDP. It’s been a decade since something like this has happened.

According to the latest Reserve Bank of India figures, India’s current account deficit in the second quarter of 2021-22 was $9.6 billion, or 1.3 percent of GDP.

India’s current account surplus was $6.6 billion, or 0.9 percent of GDP, in the first quarter of fiscal year 2021-22.

But, exactly, what does a widening CAD imply?

Reduced foreign exchange reserves restrict India’s import capability, resulting in fewer and more expensive imported items in Indian marketplaces. More inflation is on the way. Less money spent. Demand has decreased. There will be fewer employment. It’s a never-ending circle. A current account deficit has the advantage of allowing for higher levels of domestic spending.

RUPEE NOSEDIVES, ON THE OTHER HAND,

What is the cause of the rupee’s depreciation?

When foreign portfolio investors withdraw money from the stock and bond markets, the rupee declines. They’re doing it this time because of the worldwide uncertainty produced by the Ukraine conflict. In addition, the Rupee has been under pressure as the Dollar has strengthened in response to predictions of improved development in the US economy.

Here, too, there is an instance of causes and lines getting muddled. The Rupee depreciates when imported inflation rises and current account deficits expand. Furthermore, a depreciating rupee raises import inflation and worsens current account imbalances.

YOU AND THE FALLING RUPEE

What does the rupee’s depreciation imply for you?

When the value of the rupee per dollar rises, importers are hurt badly. To make payments, they’ll have to spend more per dollar. Imports that are too expensive raise local costs. And it’s here that you’re affected.

The weakening of the rupee has pushed up domestic petroleum prices. As transportation prices grow, other basic things become more expensive. Because your tuition and tickets cost more in accordance with the Dollar value, a declining Rupee makes your foreign education and travel more expensive.

A declining rupee, on the other hand, aids exporters in receiving more rupees in exchange for dollars. In other words, it increases the purchasing power of international purchasers. However, they must spend more owing to greater manufacturing and processing costs due to the high cost of imported raw materials such as petroleum, gems and jewelry, electronics, and medicines.

As a result of Russia’s invasion of Ukraine, oil has grown more expensive on international markets. However, it has also been or will soon become your biggest headache. The reasons have previously been stated. In the global community, there are many different ways to live.

Post By – Manbir Singh

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