Rising crude oil price, disturbing sectors

Crude oil prices have been rising steadily on the back of supply cuts by the Organisation of the Petroleum Exporting Countries (OPEC) for nearly a year now. Crude oil prices hit a two-year high last month after Brent crude rose above the $71 per barrel mark. Currently, it’s above $74 per barrel.

This sharp rise in oil prices is impacting almost every business sector in the oil-importing countries, including India. Concerned over the ripple effect of this rise in prices, the Indian government has been taking up the issue bilaterally with the oil-producing countries and OPEC. While OPEC and other oil-producing countries have now agreed to increase the output by 0.4 million barrels per day between August and December, the current oil prices are slowing down the pace of economic recovery in India after the devastating second wave of the pandemic.

Besides triggering inflation and leaving a current account deficit, here is how oil prices are impacting businesses in different Indian sectors, like, Transportation cost – The price of petrol has increased by more than Rs 10 per litre and that of diesel has shot up by more than Rs 11 since the beginning of the year. This has led to an increase in freight rates and a consequent rise in the price of several commodities. Further, the rise in fuel prices reduces the incentive for people on the purchase of commercial vehicles, hence impacting the automobile sector.

Aviation – Already reeling under losses due to reduced air traffic in the wake of the COVID-19 pandemic, high crude oil prices are further hitting the profitability of the aviation sector. The operating cost of airlines has increased and as a consequence, the cost of air tickets has also recorded an uptick.

Cement – Higher crude prices push petroleum coke prices, leaving an adverse impact on cement firms. Other than this, increased freight costs and reduced spending power with consumers are also hurting the business of cement and paint companies.

FMCG – Right from securing raw material to packaging of finished products, high oil prices impact fast-moving consumer goods (FMCG) at every level. When the burden of this high input cost is passed on to consumers, the demand for such products drops. Further, the purchasing power of the country is already hit due to inflation and COVID-related economic disruption.

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