How USA’s recession can provide relief to Oil and Gas sector ?

By Mr. Yash Sharma

The number of Google searches for the term "recession" has significantly increased since the 2008 global financial crisis. Numerous analysts have projected that the greatest economy in the world, the US, may experience a short-term recession. The likelihood that the US will have a recession within the next year has increased from 15% to 30%, according to Goldman Sachs economists. According to James Gorman, CEO of Morgan Stanley, there is a 50% risk that the US economy will experience a recession In the past three months, the price of crude oil has moderated, with Brent crude oil currently trading at about $86 per barrel. Concerns of a worldwide economic slowdown as a result of central banks' aggressive tightening of monetary policy have led to a decline in crude oil prices Adding to it, ongoing COVID-led lockdowns in parts of China also caused a fall in prices. These factors helped lower energy demand, and with lower demand came lower prices. For a country like India, which imports 80% of its crude oil demand, this is a positive development. If there is a slowdown in the US, prices of raw materials may come down significantly. On the other hand, India will benefit from the recovery in crude prices, as the US is one of the largest consumers of fuel.

2022 recession might provide much needed rebalance

Recession fears are now commonplace, but analysts believe they will not be as severe as the 2008 global financial crisis. Global oil production capacity utilisation rates are at historic lows, putting upward pressure on prices until very recently A recession is needed to restore buffer stocks to more normal levels.

Profit-maximizing Companies do not intentionally invest in growing oil reserves or excess capacity. Instead, oil inventories and reserve capacity unintentionally increase when consumption is lower than expected as the business cycle suddenly slows down.

The recessions of 2001-2002, 2008-2009, and 2020 and the mid-cycle slowdowns of 1997-98 and 2014-15 caused oil and fuel inventories to surge. The opposite is not the case when your business continues to expand rapidly while your inventory increases significantly. Inventory increases only when the business cycle slows unexpectedly, and production capacity slows down as well.

The Government of India cannot reduce inflation by producing more barrels of oil, cubic meters of gas, and megawatts of electricity. However, by slowing the economy, they may restore energy growth to a level that is consistent with the trend in output, replenish inventory, and boost spare capacity to more manageable levels.

Prices may be cooling.

Slower growth in the advanced economies may help reduce crude oil and other commodity prices, reducing the fiscal burden on India. An economic recession significantly reduces government spending. An economic downturn in the West could lower commodity and oil prices. India's imports of fertilizers and oil will become cheaper as global economies grow more complex.

Meanwhile, petroleum minister Hardeep Singh Puri said today that India would be stepping up its production of crude oil to meet 25 per cent of demand by 2030. Currently, India consumes five million barrels of petroleum daily and imports close to 85 per cent of its total crude requirements

Impact on trade deficit

The surplus of imports over exports is known as a trade deficit. In July 2022, India's trade deficit reached a record high of US$ 31 billion. In the same time period last year, it was $10 billion.

After the US and China, India is the thirdlargest consumer of crude oil. But every year, we import close to 85% of the crude oil we use. A decrease in oil prices benefits India's trade balance as a result. This is due to the fact that imports slow as crude oil prices fall. By doing so, the export-import gap is reduced The currency is also supported by the reduced trade deficit. India's oil trade deficit would be around US$ 140 billion if crude oil prices were to reach US$ 100. India's oil trade deficit will increase by around US$ 15 billion for every US$ 10 increase in crude oil from US$ 100

Conclusion

While a recession in the United States may have a negative impact on the global economy, it may provide some relief to India's oil and gas sector. A recession may help restore buffer stockpiles to more normal levels, so balancing the market and stabilising oil prices. Furthermore, a slowdown in the United States could lower commodity and oil prices, reducing India's fiscal burden and improving its trade balance However, it is important to note that a recession is not a guaranteed solution to the challenges confronting India's oil and gas sector. While lower oil prices can be beneficial to India's trade balance and overall economy, they can also have a negative impact on the revenues of the country's oil and gas companies, potentially leading to job losses and slower economic growth.

Furthermore, it is critical to remember that investing in renewable energy sources and reducing the country's reliance on fossil fuels is the long-term solution to the challenges faced by India's oil and gas sector. The Indian government has already made steps in this direction by setting ambitious renewable energy objectives, and it is critical to continue investing in this sector in order to create a sustainable and secure energy future.

To summarise, while a recession in the United States may bring some temporary respite to India's oil and gas sector, it is not a complete answer to the sector's issues. Instead, the Indian government should prioritise renewable energy sources, infrastructural investment, and laws that encourage sustainable and responsible energy usage. By doing so, India may attain a more resilient and sustainable energy future while simultaneously contributing to global climate change efforts.