Oil Price at a 7 year High
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.
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