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The great oil circle

April 5, 2015

 Abstract: The price of crude oil is driven by the marginal cost of production of oil and its close substitutes across the globe. Before supply can be increased by exploiting oil reserve pools, it has to be remunerative for producers to do so, given the current market price. Decline in oil prices since the onset of the financial crisis in 2008 has increased the space for monetary and fiscal stimulus and reduced vulnerability on the balance of payments front for India. Given the defensive pricing power of oil producers, it seems unlikely that oil prices will remain low for long. Three priorities are suggested while favourable times last, namely:

  • Move from subsidy-based product prices to direct benefit transfer;
  • Develop domestic conventional and alternative sources of energy; and
  • Focus on conservation.

Keywords: energy; crude prices; government subsidies; balance of payments

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