After a production cut agreed upon by oil producers, crude prices are rising again. But demand will continue to be weak
As the world’s largest oil-producing countries agreed to somewhat reduce production after an intense price war last month between Russia and Saudi Arabia saw rates drop to their lowest level in almost two decades, crude oil prices have started to climb once again. But the spike, and this, using the one of North Sea Brent Crude which is a global benchmark, has found it difficult to pierce the $30 a barrel mark. Analysts believe that after the International Monetary Fund (IMF) report, which said that the world economy will shrink by almost three per cent this year, oil prices cannot rise to offset that much of a fall in demand. Even with countries such as India using the opportunity to fill their strategic reserves of oil to the brim, the additional demand this will produce will not offset the overall fall. This is a good thing for India, although not necessarily for the consumer. The Central Government recently used the fall in the crude price to increase existing excise duties on prices paid at the pump and passed a law to be able to increase the excise rates later on. Therefore, the fall in prices at the pump may be negligible. That said, the Government will be desperate to raise additional revenues after the six-week lockdown would have devastated the economy. The additional revenues that these potential excise duty enhancements will produce though will be tempered by a reduction in demand as the informal sector remains effectively shut and the formal sector is expected to operate at a mere fraction of its pre-COVID-19 ability.
The reduction in crude prices might also have a medium-term impact on demand and the technology progress of alternative environmentally-friendly mobility solutions. Electric vehicles, already expensive, might see a fall in demand as consumers will switch to more affordable petrol-engined cars. Handing out subsidies for buying such vehicles will be seen as an avoidable extravagance by Governments during a public health crisis. This may be one of the unintended consequences of the pandemic but we feel that the work in this space must continue. One of the positives of the past four weeks has been the cleaner and more breathable air across the world. We should not see that as an aberration but as the new normal. Crude prices may never recover from that shift.