The World Bank on crude oil prices
For India, that will mean there won’t be a boost to the economy from lower oil prices in 2018 either
Crude oil prices are at their highest since 2014. Given the importance of crude oil prices for India’s economic growth, what does the World Bank’s ‘Global Economic Prospects’ for 2018, released last Tuesday, have to say about them? Well, it forecasts average oil prices (a simple average of Dubai, Brent and West Texas Intermediate prices) to go up by another 9.4% this year, after a rise of 23.8% in 2017. For 2019, the prediction is for a much more sober rise of 1.7%.
For India, that will mean there won’t be a boost to the economy from lower oil prices in 2018 either. That makes it all the more imperative for other factors to contribute to the higher GDP growth of 7.3% expected by the World Bank. Exports could be a booster and many economists are pinning their hopes on the global economic recovery, but it’s noteworthy that the World Bank predicts global trade volume to rise by 4% this year, lower than the 4.3% growth notched up last year. Perhaps, as the World Bank expects, higher domestic investment demand and a repairing of damaged bank balance sheets will do the trick.
The World Bank report doesn’t have a break-up of the sources of growth in India, but it does have one for South Asian GDP, of which of course India accounts for the bulk. For South Asia as a whole, while consumption growth, both private and public, is expected to fall a bit in 2018, fixed investment growth is predicted to rise sharply, while the drag from negative net exports (exports minus imports) comes down a little. It is rather doubtful that, for India, investment demand is going to come back so soon and if oil prices remain high, it’s difficult to envisage the drag from net exports coming down too.
Chart 1 shows the growth in oil consumption since 2016, with predictions for 2018 taken from the International Energy Agency. Note that oil consumption growth is expected to slow this year in China and the OECD countries.
Chart 2 shows the World Bank average real price of crude oil in USD/barrel. Real oil prices are calculated as the nominal price deflated by the international manufacturers unit value index, in which 2010=100. The Bank says the 1970-2017 average for the real price of oil is $37.7 per barrel.
There are many reasons why crude oil prices will be capped, including rising production from US shale and lower energy-intensive growth due to fuel-efficient technologies. Says the World Bank report, “Downside risks for oil prices arise mainly from the resilience of the U.S. shale industry and from weak compliance to the agreed production cuts. Conversely, upside risks to prices include the possibility of supply disruptions among politically stressed oil producers (e.g., Iraq, Libya, Nigeria), as well as stronger demand growth.”
Editor's Picks »
- Huawei troubles haunt T-Mobile’s $26.5 billion sprint merger
- The art of #MeToo: Artist Subodh Gupta steps down from Serendipity Arts Festival
- New Facebook bug may have exposed unposted photos
- Reforms not possible by ‘fragile coalitions’: Arun Jaitley
- Railways to equip TTEs with devices to check realtime seat availability
- Markets yet to warm up to KEC International’s record order book
- Indraprastha Gas and Mahanagar Gas shares are low on fuel
- Overhang of capacity constraints lifts for ACC, Ambuja Cements
- Stock market traders fall for the ‘buy rural’ narrative, once again
- Continuing volume momentum puts Indian ports in a good position