CRUDE OIL, GEOPOLITICAL

RISKS, GOVERNMENT POLICIES

PALAK MEHTA
(MBA) CHRIST UNIVERSITY
 CRUDE OIL
THE IMPACT OF CRUDE OIL FLUCTUATIONS IN DIFFERENT SECTORS
About 31 % of the world’s total energy demand are met by crude oil. The total oil consumption
of the world is around 96 million barrels per day. United States of America being the largest
consumer followed by China. Crude oil is the most traded commodity in the non-financial
commodities segment. Despite many calls in climate change conventions to reduce its use, the
reality is that crude oil is the king of raw materials; it is the most important raw material for
many industries. India ranks among the top five oil-consuming countries in the world. About
30% of India's total energy consumption is met by oil. India consumes 3,660 thousand of barrel
per day.

The different sectors that crude oil is consumed as a raw material and hence these sectors are
highly affected by the changes in the prices of the crude oil.
On researching it is found that the price fluctuation in crude has a direct relationship with the
following industries and the sectors.
Coke, Refined and nuclear fuel Intermediate goods
Chemical and chemical products Paper and Paper products
Leather Industry Rubber and plastics products
Textiles Food products and beverages

The sectors that show a weak relationship with the fluctuations in prices in crude oil are as
follows:
Furniture Manufacturing Machinery and equipment
Motor vehicles, trailers and Semi-trailers Other transport Equipment

The sectors that show no effect by the fluctuations In Prices of Crude Oil are given below:
Electrical machinery and apparatus Tobacco products
Fabricated metal products Wood and products of wood
Medical, precision and optical instruments Radio tv and communications
Office, Non-Metallic mineral products Publishing, Printing and reproduction

Due to the coronavirus outbreak, crude oil becomes one of the items that has turned cheaper
due to the low industry demand. Global oil prices have been on a downward trend since the
coronavirus outbreak. Industry demand in China, world's largest importer of oil, has been
low. The low-price trend has been aggrandised with Saudi Arabia's price war against Russia.
The price of crude oil dropped to $31.02 on March 9. Petrol prices have declined Rs 4.55 per
litre and diesel Rs 4.7 per litre in Delhi since January 1.
 GEOPOLITICAL RISK
Detailed study on US-China Trade war
US-China trade war is an ongoing economic conflict between the world's two largest national
economies, China and the United States. President Donald Trump in 2018 began setting tariffs
and other trade barriers on China with the goal of forcing it to make changes to what the U.S.
says are "unfair trade practices". Among those trade practices and their effects are the growing
trade deficit, the theft of intellectual property, and the forced transfer of American technology
to China. In the United States, the trade war has brought struggles for farmers and
manufacturers and higher prices for consumers. In other countries it has also caused economic
damage, though some countries have benefited from increased manufacturing to fill the gaps.
It has also led to stock market instability. The governments of several countries, including
China and the United States, have taken steps to address some of the damage caused by a
deterioration in China–United States relations and tit-for-tat tariffs.

The U.S. trade deficit with China in 2019 was $345.6 billion. That's 18% less than 2018's
$419.5 billion deficit. The trade deficit exists because U.S. exports to China were only $106.6
billion while imports from China were $452.2 billion. The biggest categories of U.S. imports
from China were computers, cell phones, apparel, and toys and sporting goods. A lot of these
imports are from U.S. manufacturers that send raw materials to China for low-cost assembly.
Once shipped back to the United States, they are considered imports. China's biggest imports
from the United States are commercial aircraft, soybeans, and semiconductors. In 2018, China
cancelled its soybean imports after U.S. President Donald Trump started a trade war. He
imposed tariffs on Chinese steel exports and other goods. By 2019, soybean imports had
doubled to $8 billion, still less than the $12 billion imported before the trade war.
CAUSES
China produces many consumer goods at lower costs than other countries, and buyers,
including those in the United States, are drawn to low prices. Most economists agree that
China's competitive pricing is a result of two factors:
 • A lower standard of living, which allows companies in China to pay lower wages to
workers.
• An exchange rate that is partially fixed to the dollar.
China is the world's largest economy and has the world's largest population. It must divide its
production among almost 1.4 billion residents. A common way to measure the standard of
living is gross domestic product per capita. In 2018, China’s GDP per capita was $18,236.
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that
includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed
exchange rate. When the dollar loses value, China buys dollars through U.S. Treasury’s to
support it.
CONSEQUENCES
China must buy so many U.S. Treasury notes that, up until June 2019, it was the largest lender
to the U.S. government. Japan is currently the largest. As of November 2019, the U.S. debt to
China was $1.09 trillion. That's 16% of the total public debt owned by foreign
countries.10 Many are concerned that this gives China political leverage over U.S. fiscal policy
and worry about what would happen if China started selling its Treasury holdings. It also would
be disastrous if China merely cut back on its Treasury purchases. By buying Treasury’s, China
helped keep U.S. interest rates low.9 If China were to stop buying Treasury’s, interest rates
would rise.11 That could throw the United States into a recession. But this wouldn’t be in
China's best interests, as U.S. shoppers would buy fewer Chinese exports.
U.S. companies that can't compete with cheap Chinese goods must lower their costs or go out
of business. Many businesses reduce their costs by outsourcing jobs to China or India. U.S.
manufacturing, as measured by the number of jobs, declined 35% between 1998 and 2010,
before rebounding by about 12% from then through the end of November 2019. Overall,
manufacturing jobs in the United States have declined by about 27% since 1998.

WHAT WAS THE IMPACT ON US-CHINA TRADE WAR ON INDIA

The study named 'Trade and Trade Diversion Effects of United States Tariffs on China' shows
that the ongoing US-China trade war has resulted in a sharp decline in bilateral trade, higher
prices for consumers and trade diversion effects - increased imports from countries not directly
involved in the trade war.
The study puts the trade diversion effects of the US-China tariff war for the first half of 2019
at about $21 billion, implying that the amount of net trade losses corresponds to about $14
billion. The US tariffs on China have made other players more competitive in the US market
and led to a trade diversion effect. These trade diversion effects have brought substantial
benefits for Taiwan (province of China), Mexico, and the European Union. There are apparent
signs of an economic slowdown in the world and India is no exception. Nevertheless, the Indian
policy of adoption of non-alignment in the Cold War era helps India to save itself from the
counter effects of the trade war compared to other economies. It maintains economic and
diplomatic relationships with countries from either side.
 • There have been positive developments recently in terms of trade growth of India to the
US and China. There has been a rise in the export of goods to both countries. Export to
the US grew by 9.46% to $52.4 billion.
• As many as 203 Indian goods are likely to displace Chinese exports to the US, like
rubber, carpets, graphite electrodes, etc.

GOOD RIPE FOR EXPORT AS A RESULT OF US-CHINA TRADE WAR

The ongoing trade war between the US and China offers an opportunity to India for boosting
exports of as many 350 products such as chemicals and granite to these countries. The Indian
products which can tap the Chinese market include copper ores, rubber, paper/paperboard,
equipment for transmission voice/data in a wired network, tunes and pipes. Similarly,
domestic goods which can grab exports opportunities in the US market include industrial
valves, vulcanised rubber, carbon or graphite electrodes and natural honey. Increasing exports
would help India narrow the widening trade deficit with China, which stood at USD 50.12
billion during April-February 2018-19.

IMPACT OF US-IRAN TENSION ON INDIAN ECONOMY

India and Iran share deep political, economic, strategic ties. India will not want Chabahar Port,
a new transit route between India, Iran and Afghanistan that bypassed Pakistan, jeopardised.
The port is vital for New Delhi for trade and also to counter growing Chinese influence in the
Arabian Sea with the development of the Gwadar port in Pakistan, which is less than 100 km
from Chabahar.
• The West Asian region accounts for over two-thirds of India’s oil imports. As India
brought down the oil imports from Iran to zero in the wake of American refusal to give
us an exemption in regard to trade with Iran, Iraq became a vital supplier • the growing
 tensions between the US and Iran shall kick off a vicious cycle of adverse impacts for
India, which are cascading in character.
• With Iran and Iraq yet again plunging into a crisis of grave proportion, the danger of
ISIS coming back in the same or different form still lingers. Such an eventuality will
impact the global economy and thereby accentuating the reverse flow of foreign
investment from India.
• The Indo-Iranian trade has already fallen by about 80 per cent in the first ten months of
the financial year 2019-20 mainly due to the impact of American sanctions on nations
trading with Iran.
• The combined effect of higher import payments due to a hike in oil prices, falling
exports, the outflow of foreign investment, etc., would be weakening rupee. • The
tightening of global oil prices shall cause inflation. The combination of falling growth
and growing inflation can prove to be lethal for the Indian economy.
• The new tensions can cause further anxiety in the global gold market that is always
susceptible to world developments. The higher gold prices can widen the Current
Account Deficit unless the situation leads to lower demand for the yellow metal.
• Increased hostilities between the US and Iran will create diplomatic and foreign policy
challenges.

ANALYSIS OF THE RECOVERY OF THE ECONOMY FROM CORONAVIRUS

As the coronavirus continues its march around the world, governments have turned to proven
public health measures, such as social distancing, to physically disrupt the contagion. Yet, doing
so has severed the flow of goods and people, stalled economies, and is in the process of delivering
a global recession. Economic contagion is now spreading as fast as the disease itself.
The global financial crisis follows the following types of shocks-
• V-shaped shock
• U-shaped shock
• L-shaped Shock
V, U, L shocks can come in different intensities. A V-shaped path may be shallow or deep. A
U-shape may come with a deep drop to a new growth path or a small one.
Indian industry seeks relief measures to aid economy so as to stop the fall of CII, GDP. Indian
industry has urged the government to provide relief measures in wake of the rapidly spreading
Covid-19 pandemic that has derailed the economy. India’s gross domestic product (GDP)
growth could fall below 5% in fiscal year 2021 (FY21), if policy action is not taken urgently,
according to the Confederation of Indian Industry (CII). Growth in the third quarter (October-
December) slowed down to 4.7% and the impact of the Covid-19 outbreak is likely to pull it
down further in the fourth quarter, said the industry body. CII said the government should
consider providing a strong fiscal stimulus to the extent of 1% of GDP, or ₹2 trillion, to the
poor, which would help them financially and also spur consumer demand. It has also suggested
removing a long-term capital gains tax of 10% and fixing the total dividend distribution tax at
25%.
 GOVERNMENT POLICIES
UNION BUDGET 2020- TO BOOST CONSUMPTION
Union Budget 2020: FM Sitharaman announced slew of measures to boost consumption and
revive growth. Taking a pragmatic approach, Finance Minister Nirmala Sitharaman
announced slew of measures to boost consumption and revive growth, including change in
personal income tax rates, hike in deposit insurance coverage to Rs 5 lakh per depositor,
listing of insurance behemoth LIC.
Highlights
• Tax relief for middle class- Finance Minister Nirmala Sitharaman announced a
change in the income tax slabs. Its revised income tax rates for earning up to Rs 15
lakh, while no tax will be applied on earnings up to Rs 5 lakh. The new slabs have
significantly reduced the taxes for most of the brackets. Those earning Rs 5-7.5 lakh
will now pay just 15 per cent, while those earning up to Rs 5 lakh in a year will pay
no tax. If you are earning between Rs 10 lakh to Rs 12.5 lakh and between Rs 12.5
lakh and Rs 15 lakh, you will have to pay lesser tax than before.
• Govt to sell stake in Life Insurance Company- In her Budget speech, Nirmala
Sitharaman said that the government proposes to sell a part of its holding in LIC by
initial public offering (IPO). The minister, however, did not reveal the percentage of
holding that it would sell.
• FY20 fiscal deficit target revised to 3.8% from 3.3%
• Allots Rs 1.7 lakh crore for Infrastructure
• The plan of 100 airports under UDAN scheme.
• Rs 99,300 crore allocated for education sector; new education policy soon.
• Abolish Dividend Distribution Tax (DDT)- Sitharaman during her Budget 2020
speech said Dividend Distribution Tax has been removed and will be applicable to
individual investors only. Currently, companies are required to pay DDT on the
dividend paid to its shareholders at the rate of 15 per cent plus applicable surcharge
and cess, which is in addition to the tax payable by the company on its profits.

26TH MARCH SPEECH ON RELIEF OF COVID-19 PATIENTS

These are the highlights of the finance minister’s address on March 26th-
• The FM announced a Rs. 50 lakh per person medical insurance cover for medical
workers. his is targeted at 2 million individuals across the country.
• Pradhan Mantri Gareeb Kalyan Anna Yojana: Supply of foodgrain, either rice or
wheat, to be doubled, and to be offered free of cost, for the next three months.
• Farmers: Kisan Samman Nidhi, currently at ₹6,000 a year, will be frontloaded.
Farmers will get the first instalment of ₹2,000 ahead of schedule on April 1.
• Mahatma Gandhi National Rural Employment Guarantee Scheme: The wage rate will
be increased to ₹202 a day from ₹182 a day currently and this will continue after the
lockdown ends. This will benefit about 5 crore people across the country, increasing
their income by ₹2,000 a year.
• Ex-gratia of ₹1000 in the next three months will be given to to 300 million poor
senior citizens, poor widows and poor disabled. This will be given in two
installments.
• 200 million women with Jan Dhan account holders will get ₹500 a month for the
next three months.
• Ujjwala Scheme (The government scheme gave subsidised cooking cylinders to poor
households): Nearly 83 million people availing this scheme will get free cooking gas
cylinders for the next three months.
• Women self-help groups: The next announcement will help 6.3 million such groups,
benefitting 70 million households. The collateral-free loans, under Deen Dayal
Yojana, will be doubled to ₹20 lakh from ₹10 lakh currently.
• For all firms with up to 100 employees (if 90% of the staff who earn less than ₹15,000
a month): The government will bear the employees' provident fund contribution, on
behalf both the employers and the employees, together amounting 24% of the salary,
for the next three months.
• The Employee Provident Fund scheme will be amended to allow non-refundable
advance up to 75% of the existing corpus in the individual's account, or three months'
wages, whichever is lower. This is expected to benefit 8 million employees across 4
lakh companies.