See a muted increase in crude output post Vienna meet

The fate of the Indian macroeconomic condition will be decided in Vienna this weekend. Oil ministers from OPEC and non-OPEC producers are gathering there to discuss crude output levels. India’s dependence on crude oil prices is well-known. Almost 30% of India’s total energy consumption is fulfilled by oil. Add to that, we produce only 30 per cent of the requirement and rest is imported. Hence any decision on cutting the output or increasing the output will lead to change in crude oil price, accordingly. The price level of crude oil directly impacts the government finances.

Last fiscal, the average price of Indian crude basket increased by 18.6 per cent that led to a rise in the import bill by 25.7 per cent to US$109.1 billion. The impact of such increase was reflected in the widening of trade deficit. Rise in import bill due to crude oil let to almost 31 per cent of the incremental trade deficit. The other major macroeconomic variables that are likely to get impacted by the sustained rise in crude oil prices are currency, inflation, interest rate, fiscal deficit and ultimately GDP growth.

Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of 14 nations, which account for an estimated 44 per cent of global oil production and 73 per cent of the world's proven oil reserves, giving OPEC a major influence on global oil prices. Earlier in the year 2014, when there was a substantial drop in the crude oil prices, OPEC countries decided to cut production by 1.8 million barrels a day, which helped crude oil prices to rise again from the low of around US$ 28 per barrel to touch US$ 80 per barrel.

The OPEC meeting in Vienna is going to decide the future output level of crude output. From the noises emanating from Vienna, we do not see much of the crude production being added into the system. The reason being, internal disagreement between members. Some of the OPEC members including Iran and Venezuela are against any increase in the crude output whereas non-OPEC member such as Russia and USA along with OPEC member Saudi Arabia support are supporting an increase in crude output.

Therefore, we may see crude oil prices hovering around USD 70 per barrel. If prices remain around this level, Indian economy will be able to absorb such price level of crude oil, without impacting much to the macroeconomic variables.