Measuring the Instability Premium and the Oil Price Shocks to the Indian Economy

Abstract

Instability in the world has led to lag availability of various kinds of resources, particularly oil. In order to procure oil, which is a major form of energy, a nation pays, what has come to be known as an 'Instability Premium' (how do you define instability premium in relation with oil price hikes?, how do you find the instability premium, of what importance is the premium that is calculated on oil prices at the supply side?). The instability gets manifested in the form of shocks to the oil prices (can you specify what is the kind/nature and extent of the shock? The causes (enumerate all) of such shocks could be positive or negative. It is euphemistically understood that anything which adversely affects the large nations’ (as in the theories of International Trade) interests in the oil sector is a 'Shock', it may be a loss of gas contract to some other vehemently emerging hegemony, economies of scale (what are the economies of scale after merger? How would sharing of ‘benefits’ under ‘synergy’ be possible between consumers and producers?) after merger of two oil majors corporations without the senate approval, a dare drive to pass on the benefits of synergy to the consumers or even producer nations focusing upon developing markets in a continent having a powerful effect on oil prices (how does this affect as a shock?). When a large nation reacts to such changes adversely, it instigates a $10-$12 Instability Premium on oil prices, so, it intrudes into the fiscal capacity of the developing nations.The prophecy of the capitalism to have ‘ways’ (do you intend to create an analogy against capitalists?), has astounded the interests of many. Interests of the ‘developing and other than capitalist nations’ vouches a need for scientific, political and consistent end to the instability and the sufferings associated with it. India's growth prospect largely hangs on where the oil prices. How is supply demand mismatch manifested in the case of Indian Economy? How is the mismatch causing such an inflationary situation? Check for the oil price changes and its impact of India’s Balance of Payments? Check when does this shock make an impact on the Real National Income?Why do oil prices play such a vital role on the future of the world's second fastest growing economy? India ranks among the top 10 largest oil- consuming countries and oil accounts for about 30% of India's total energy consumption. India imports about 70% of its total oil consumption and makes no exports. This naturally would create a supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production is only 0.8 million barrels per day. An IMF report says that among the oil importing countries, the largest impact on GDP growth and the balance of payments is expected to be felt in India, Korea, Pakistan, Philippines, Thailand, and Turkey.The report further indicates that a USD 5 per barrel increase in oil price would lead to a 1.3% increase in inflation and a drop of 1% in GDP growth. How are such standards calculated? Although the entire burden of the spike in price has not been passed to the domestic consumer, the Indian government's finances have taken a sufficient hit, affecting the macroeconomic outlook in India. India, as a result, will experience deterioration in its balance of payments, putting downward pressure on exchange rates.Ultimately, imports would become more expensive and exports less valuable, leading to a drop in real national income. Higher oil prices generate cost push inflation, leading to increased input costs, reduced non-oil demand and lower investment in net oil importing countries. Also, tax revenues tend to fall and the budget deficit increases, due to rigidities in government expenditure, which drives interest rates up.The economic system of the country relies on the value of the country's currency to stay the same how is the oil trade related to the forex market changes? The primary reason that inflation affects the economy so negatively is the loss of value. Inflation impacts the economy so significantly because economies are organized based on the value of currency, both within and outside of the country. The International Monetary Fund, however, said that though soaring oil prices and inflation in emerging economies pose new risks to economic recovery, it is not yet strong enough to derail the economy.India imports about 76 per cent of its crude oil requirements which amounts to an oil import bill of around $50 billion every year. India’s crude oil import bill rose by 3.48% in rupee terms and 16.67% in dollar terms during the first half of the current fiscal year.