Crude oil could crack up economic assumptions
PremiumRussia’s escalation of tensions with Nato led to an oil-price upsurge that might turn out to be more than just a blip. If so, Indian policymakers will need to redo their math for our economy
Hollywood folklore features a reckless game called ‘chicken’: two cars race headlong towards each other and the one that swerves away first from this collision-course loses. For Russia’s no-less-rash confrontation with the Western alliance called the North Atlantic Treaty Organization (Nato), over Ukraine, the illustrative imagery that may serve us better is a dish of Soviet-era vintage still found on the menus of restaurants in India: Chicken a la Kyiv. Served hot, its reputation derives from an oily spurt of molten butter it yields when dug into. Oil revenues are a bounty that Moscow has used increasingly as fuel for its grandiose plans, acting in concert with an oil cartel that has regained some pricing power lost to a gush of US shale-oil, and the harder it digs itself in against Nato, or plunges forth, the higher global hydrocarbon prices go. Whether or not Russia can offset an onslaught of Western economic sanctions for its ‘siege’ of Ukraine by pivoting to Asian markets, we should brace for expensive oil in the near-term with underlying price-support over the long-term from an oil-investment drop-off as we switch to clean energy. While a new phase of oil geopolitics could spell further volatility, India’s immediate concern is what dearer oil imports might imply for our economic recovery.
As finance minister Nirmala Sitharaman said on Tuesday, crude oil was among the threats to financial stability discussed at a meeting of the council tasked with keeping watch of such macro risks. After all, we import more than four-fifths of our oil. An international dollar price in three-digits per barrel is looking likely after Russia recognized Ukraine’s breakaway provinces of Donetsk and Luhansk as free states and ordered its armed forces in, an act seen by Nato as a possible prelude to an even bigger annexation than Crimea’s in 2014, and while oil may not reach its mid-2008 record high of $147, it could stay above $100 now that hopes of a Russian back-down have dropped. Since oil shocks have always had a correlation with severe recessions in the West, nerves have gotten taut. As a tech-enabled success story of the past decade, US shale was expected to play the balm, with supplies made viable by prices going above break-even levels placed in a range of $40-70 per barrel. Given this back-up, some market analysts had posited that oil above $80 or so could henceforth only be a blip. Yet, with Russia cozy with Opec, that hypothesis may have weakened. Might the US lifting Iran’s export clamps help? It could, but Tehran has raised the ante in exploratory talks on its nuclear-deal revival in ways that might deprive the White House of this lever.
India’s latest Economic Survey, meanwhile, suggests that oil no higher than an average $75 has been assumed for our 2022-23 forecasts. A better tax mop-up than budgeted for next year could give us a fiscal buffer to snip fuel levies and keep retail rates steady, but a swollen bill for inelastic imports can potentially join outflows of capital to weaken the rupee, meddle with India’s monetary policy and cause other adverse effects. A study by our central bank found that every $10 rise in oil under the usual settings can push inflation up by almost half a percentage point. Its last policy review, however, did not speak of an oil upsurge as a major challenge. Yet, unless oil cools down, its price-stability promise would demand action at odds with its growth-supportive stance. Tough choices await policymakers. Our oil math for 2021-22 looks set to reveal some cracks and we sure hope it’s not a sign of worse to come.
Never miss a story! Stay connected and informed with Mint. Download our App Now!!