The Turmoil in Iraq has already pushed the crude oil price to a 9-month high level.
If such a situation persists, pressure on supplies will increase. And as a result, this will further push the oil prices higher. Of course, this will be negative for a country like India, which depends a great deal on oil imports. Amongst other things, it will widen the trade deficit.
In our view, higher oil production in the US is indeed a big positive. However, owing to ongoing political turmoil and ban on US oil exports, we remain skeptical about a decline or even stability of oil prices in near future.
Financial year 2014 has been a better one for India, as the year witnessed narrowing of current account deficit (CAD). However, this was largely attributable to lower gold imports and stability in global oil prices. On the other hand, the Indian exports had not played much of a role in narrowing the gap. The current scenario indicates higher probability of increase in oil prices, which in turn will widen the CAD.
Oil prices are quite related to macro events. The oil producing nations have used the pricing of this scarce commodity to their advantage. And India being highly dependent on oil imports is at mercy of oil suppliers. In the wake of the current events, making India less dependent on oil imports is the need of the hour. While India cannot do away with the imports, the Indian government will have to bring various reforms, to increase energy productivity. Thus, the government needs to take sufficient steps to encourage other sources of energy. This will help us becoming less reliant on oil import and also makes us resilient to sudden jump in the oil prices as seen now.