• Oil constitutes one-third of the country’s total imports and is considered to have wide-ranging impact on its economy.

• Oil is a commodity, and as such, it tends to see larger fluctuations in price than more stable investments such as stocks and bonds. There are several influences on oil prices, a few of which we will outline below.

Oil prices change due to economics of supply and demand  :-

• Laws of supply and demandcause oil prices to change. When supply exceeds demand, prices fall and the inverse is also true when demand outpaces supply.
• The 2014 fall in oil prices can be attributed a lower demand for oil in Europe and China, coupled with a steady supply of oil from OPEC. The excess supply of oil caused oil prices to fall sharply. 

Oil prices change due to subjective wishes of oil producing countries :-

• In 1973 OPEC ratcheted up prices four fold in anger at the Western World’s support for Israel in the Yom Kippur Arab-Israel conflict.
• Recently US pulled itself out of the JCPOA , the multi-nation nuclear deal that had been signed in 2014 to contain Iran’s nuclear programme. Simultaneously, US issued notices that all countries and companies must stop doing business with Iran within six months and that if they did not comply, US would sanction them under the US law, CAATSA (Countering American Adversaries through Sanctions Act).
  • So oil importing countries are likely to move away from buying oil from Iran. This is likely to drive up global oil prices further.
• The levers of oil policy in most petro states are in the hands of autocratic leaders
• Personalisation would not have been an issue in the past when oil was traded mostly against long-term supply contracts. Today, however, in an integrated, liquid and fungible market characterised by flexible, short-term deals, it is of relevance. The local actions of individual leaders have global ramifications on prices.
• Venezuela
  • The political and economic crises affecting the oil-rich South American country have resulted in its crude production going into freefall.
  • The collapse has tightened oil markets much more quickly than anticipated, experts said. Output is down so much that Venezuela has cut production even more than Saudi Arabia, Opec’s biggest producer.

Other reasons that affect oil prices :-

• Political instability in the Middle East causes oil prices to fluctuate, as the region accounts for the lion’s share of the worldwide oil supply. 
• Production costs, political turmoil and even interest rates can play a significant role in the price of oil.
• Natural disasters are another factor that can cause oil prices to fluctuate. For example, when Hurricane Katrina struck the southern U.S. in 2005, affecting 19% of the U.S. oil supply.

Way forward:-

• Demand management, accelerated development of electric vehicles and increased investment in clean energy R&D are necessary. Such measures would most effectively counter the impact of personalised and emotional oil policy.
• Indian measures :-
  • Expedite the process of exploring domestic avenues and diversify its sources of oil supply.
  • There is an urgent need for development of non-conventional (including renewable) sources as a substitute for conventional sources to meet the energy needs.
  • Energy subsidy reforms along with regulations, standards, and targets directing the efficient level of utilization of oil as a fuel are important to reduce dependence on oil imports.
  • Public Transport should be made available and user friendly so that Individual vehicles reduce and demand for oil decreases.