Economic growth of a nation is primarily driven by energy. It is the key element for the sustenance in the future modern economies. But, sadly the global energy supply system is slanted towards the limited amount of fossil fuels. In every aspect of development, energy plays a vital role. It may be related to reducing poverty, increasing productivity or improving quality of life, but lack of energy acts as a severe impediment to sustainable social development and economic growth.
Crude oil is one of the important sources of energy that has the ability to pose threats, in terms of price, to energy supply and security. It is one of the most necessitated commodities in the world and India imports around 100 million tons of crude oil and other petroleum products. World primary energy consumption is 12274.6 Mtoe (Million tonnes of oil equivalent) in 2011, the primary energy consumption varies with availability and specific utilities of different types of fuels with the various pie, oil: 33.06%; natural gas: 23.67%; coal: 30.34 %: nuclear energy: 4.88%; hydroelectricity: 6.45%; renewable: 1.59%.
China leads the order of absolute primary energy consumption with 21.29%, followed by US 18.49%, Russian Federation comes third with 5.59%, then comes India in Fourth with 4.55%.
Impact on Indian Economy
Increasing quantum of energy products, mainly crude oil, has significant impact on Indian economy. It does not act as just a source of energy but as raw material in many industries. Prices of crude oil matter to every economy because it is the lifeline of almost every economy. On one hand there are major oil producers like Organization of Petroleum Exporting countries (OPEC), Russia, and United States, while on the other hand are the importing economies like India, China, and Europe. The demand is increasing rapidly due to insipid economic growth, coupled with surging production.
Global crude oil prices are down nearly 40% this year to $60 per barrel-levels from $110/barrel at the start of the year. Energy security is crucial for both sustaining high economic growth and controlling inflation. With rapid economic growth, energy demand in India has been rising rapidly, and India is now the fourth largest consumer of crude oil in the world. Unfortunately, India has to import most of its oil requirement, leading to severe pressure on the economy when the oil prices rise and vice-versa. India imports a major part (around 80%) of its crude oil requirement. A small decrease in the price of oil is enough to drive down the value of imports. This helps in healing the current account deficit (CAD) whereby a fall in oil prices by $10 per barrel helps reduce the current account deficit by $9.2 billion that is approximately 0.43% of the Gross Domestic Product.  Fall in the global prices of the crude oil came as a boon for India. It assisted in reducing the retail inflation by 0.2% and wholesale price inflation by 0.5%. With decrease in the oil price, fiscal deficit also narrows down and the government gains the opportunity to offset the previous under-recoveries. The currency also benefits from lower CAD on the back of reduced demand for dollars required to fund the deficit. In this way, the government has remained committed to the financial consolidation without compromising the economic growth.
Positives apart, decrease in the price of crude oil also negatively impacts Indian economy. India is the sixth largest exporter of the petroleum products and with the decrease in price of oil, the amount of exports also decreases. The fall in global crude prices has impacted private and public sector upstream companies differently because of the latter’s contribution to the subsidy given to state-run refiners for selling the regulated products at below-cost price, and the subsidy declined with decline in crude prices.
India’s merchandise exports declined for the 14th month in a row in December 2015. The cumulative value of merchandise exports for the April-December 2015 period was $196.6 billion, a drop of 18% over $239.92 billion during the same period last fiscal. Merchandise exports account for a fifth of India’s GDP, besides providing jobs to millions of Indians. Further, in pursuance of the referendum of Brexit, the price of crude oil declined by 5% which would help us in filling our large import basket easily. But due to weakening of pound and euro, dollar has become stronger and it will thus offset the advantage for India lower crude prices.
In its monthly report, OPEC (Organization of the Petroleum Exporting Countries) highlighted that India’s crude oil demand rose by 0.6 MMbpd (million barrels per day) in March 2016. It’s 15% more than the same period in 2015. India’s crude oil consumption rose to 4.6 MMbpd in March 2016. It’s the second-highest level ever recorded. The rise in demand for fuel oil and gasoline by 29% YoY (year-over-year) supported the crude oil demand. The IEA (International Energy Agency) estimates that India’s crude oil demand growth rate will be the highest by 2040.
Given our increasing dependence on imports effects to the Indian economy, by the increase in the price of crude oil the inflation increases, government have to spend too much on subsidy, our exports become weaker, investment decreases and GDP is also affected. It is a universal fact that oil price volatility has also increased and future prices of crude oil will rise. Thus, to meet the growing demand for crude oil, diesel and petrol etc. in the long run, Indian government should take various measures for efficiency improvement in energy use such as market linked relative prices, minimizing subsidies, and such other economic friendly initiatives.
This article has been co-authored by Ms. Shriya Mehta, a 9th semester student of law: Raffles University, Rajasthan)
 http://marketrealist.com/2016/05/will-china-india-impact-crude-oil-market-2016/ :last accessed on: 8th September 2016