Investors bet big on conventional energy
The biggest commodity story for the past 10 months has been the falling trend in crude oil prices. In 2013, prices had moved largely between $95 and $105 a barrel of Brent crude. In June, Brent was $107-108. Since then, it has slid, hitting $44-45 in January. Prices have moved between $45 and $55 a barrel in 2015. Gas and coal prices have also weakened in tandem and stabilised lower.
Low fuel prices have been the biggest factor in India’s economic recovery (patchy so far). Cheap fuel is the primary cause of a lower current account deficit (CAD). It has also meant lower fuel and fertiliser subsidies, which means it has contributed to a lower fiscal deficit. Cheaper fuel means lower inflation, better operating ratios for the railways and lower costs for thermal power generators. Public sector undertakings (PSUs) in the oil marketing sector have also seen turnarounds as a result of benign price trends and decontrol of diesel and petrol.
But Indian policymakers have no control over international fuel prices. A very large share of India’s fuel consumption is imported, including roughly 80 per cent of crude oil, 32 per cent of gas and 20 per cent of coal. Domestic prices are benchmarked to international prices.
There are a few reasons why international crude oil prices have fallen so sharply. One is the slow global economy, which has meant lower fuel demand in general. A slowing China, moving away from coal, has also put pressure on coal prices. Another factor is the shale revolution in the US, which has created potentially large new supplies.