InvestorQ : What are the key risk to India from higher oil prices?
sarah Leo made post

What are the key risk to India from higher oil prices?

Rashi Mehra answered.
1 year ago

The risks to India from high oil prices are already well documented. For example, India still relies on imported crude for more than 85% of her daily needs and that makes India extremely susceptible to any oil price spike. Since the beginning of Dec-21, Brent crude has spiked by 27% and shows no signs of relenting for now. Here is why such a sharp rally in oil prices has a negative impact on India.

It has been estimated by the RBI that every $10 spike in crude price adds to retail inflation by 47 bps and fiscal deficit by 43 bps as a percentage of GDP. Unlike many of the other oil consuming economies, India did not create any war-chest out of low oil prices. Most gains from low oil prices were skimmed out by the government in the form of higher excise duties. Today, India has little oil equalization reserve available to handle higher prices.

There is a more practical risk that countries like India are facing from higher oil prices. The current levels of fossil fuels pose a funny riddle. The prices of oil are high enough to allow oil companies to focus more on fossil fuels. Crude is spinning a lot of profits at these prices. This would induce oil companies to reduce their thrust on green energy.

That is the problem since India is betting heavily on green energy as the future. The longer the oil prices stay in equilibrium, less incentive are there for the oil extractors and refiners to invest heavily in green energy. ON the other hand, it is more likely that big oil companies will get complacent about the situation. If green energy takes a back seat, India would not be too happy.