Is 20 $ per barrel price of oil good for economic growth of India and the world?

Why oil price is so low currently?

Price of any commodity depends on supply and demand.

If we see the current  global economic scenario then we can get the feel for why oil prices have gone down so steeply.

Majority of oil is consumed at following locations in the world

1. United states of America and Canada ( GDP 19 trillion dollars)

2. Europe (GDP 19 trillion dollars)

3. China (GDP 11 trillion dollars)

4. Japan (GDP 4 trillion dollars)

5. UK (GDP 3 trillion dollars) 

6. India (GDP 2 trillion dollars)

Oil is very important commodity for any country's economic progress.

So we can directly correlate economic growth to the price of oil.

China ,Europe, Japan and majority of countries around the globe are experiencing recession.

This means they need less oil for their economic activities.

World's 50 to 60 % oil is consumed by China.

We know from all the news channels, Chinese economy has slipped to 6% growth rate from double digit.

This lack of demand has pushed the price of oil down to huge extent.

Moreover, USA produces oil from shale gas at the production cost of 50$ per barrel

Saudi Arebia and other OPEC (Organization of Petroleum Exporting Countries) countries produce oil at around 20 to 30 $ per barrel.

In order to drive American oil producers out of business, OPEC started to supply more oil so that oil price will go down and  it would be unprofitable for non OPEC countries to produce oil.

These are ce​rtain macroeconomic and strategic factors  that are driving down the price of oil.

How does this matter to India and world?

India's major import is oil. It imports around 300 billion dollars worth oil every year.

If oil price goes down, we will have to pay less money in foreign exchange.

This reduces our current account deficit.

Due to small current account deficit, Indian rupee will appreciate. This is explained in my previous post as follows
http://isheconomist.blogspot.in/2015/12/how-does-current-account-deficit.html

Due to rupee appreciation, Indian export sector will get badly affected. India's major exports are software, jewelry etc.

As Prime minister of India is promoting 'MAKE IN INDIA' project , appreciation of currency may not be helpful for the project.

Indian companies also export engineering goods to OPEC countries. This will also get affected.

Many Indians (especially Kerala people) work in Saudi, Oman , Kuwait etc. and send remittances to Indian coffers. It will be difficult for these people to find jobs.

So in a short term, in my opinion, India can enjoy low price of oil and come out of recession very quickly. But in a long run low price of oil is not good for economic growth of whole world and India.Due to globalization all the economies are  integrated in each other.

It is no more a solo dance but a line dance.  So if we want everybody to be better off then , oil price needs to be at optimum level.