Oil Price at a 7 year High

Tags: Economics/Business

The price of oil hit its highest level in more than seven years on 19 January 2022  as traders worried that an attack on a fuel storage facility in the United Arab Emirates  by the Yemeni Houthi rebels could affect supply.

Brent crude, which is the international benchmark for oil prices, rose almost 1% to hit $87.22 a barrel. Price rises were even steeper in the US, where West Texas Intermediate crude increased by 1.3% to $84.89 a barrel.

Why oil prices are rising 

Fear of supply disruption 

The attack of the Houthis on oil facilities of UAE has led to fear of escalation of conflict in the region involving Saudi Arabia, Iran and others.

Russia and its conflict with Ukraine and unrest in Kazakhstan has added to this fear. Saudi Arabia, UAE ,Russia are major exporters of oil in the world and any conflict will lead to disruption in oil supply in the world market .

Failure of OPEC+ to increase output of oil 

In the month of December 2021, the OPEC + members had promised to increase its output by 4 lakh barrels per day  to dampen the high oil price in the world market . However the promised oil supply has not materialized leading to a tight supply and demand situation .

Optimism about World economic recovery 

The World Bank has predicted a 5.5% growth rate for the world economy in 2021 and 4.1% in 2022 taking into account a disruption in the world economy due to the Omicron wave .  However the current wave of omicron variant of Coronavirus is not as severe as the Delta variant of last year.

Market expects a good  economic recovery in the world leading to a surge in demand for oil

Impact on India 

India imports about 82% of its oil requirement and any increase in the oil price will increase the oil import bill of India

This will increase the fiscal deficit of the countries as the import bill rises. 

The rupee  is likely to  depreciate as the demand for dollars to buy oil  will put pressure on Indian rupees and will make  import costlier. 

It will increase inflation in the country as the price of oil increases.

This will lead to  flight of capital from India as RBI will follow a  tight monetary  policy to control inflation leading to a lowering of growth prospects in India.