Fall in International Crude Oil Prices

Why in News

Recent fall in international crude oil prices has reversed a six-month trend of rising auto fuel prices which saw the prices of petrol and diesel hit all-time highs across the country.

• The price of Brent crude has fallen under USD 63 per barrel from a high of USD 70 per barrel in early March 2021.
• Two crude oils which are either traded themselves or whose prices are reflected in other types of crude oil include West Texas Intermediate (WTI) and Brent.

Key Points

• Oil Pricing:
  
  • Generally, the Organization of the Petroleum Exporting Countries (OPEC) used to work as a cartel and fix prices in a favourable band.
    
    • OPEC is led by Saudi Arabia, which is the largest exporter of crude oil in the world (single-handedly exporting 10% of the global demand).
    • OPEC has a total of 13 Member Countries viz. Iran, Iraq, Kuwait, United Arab Emirates (UAE), Saudi Arabia, Algeria, Libya, Nigeria, Gabon, Equatorial Guinea, Republic of Congo, Angola, and Venezuela.
  • OPEC could bring down prices by increasing oil production and raise prices by cutting production.
  • The global oil pricing mainly depends upon the partnership between the global oil exporters instead of a well-functioning competition.
  • Cutting oil production or completely shutting down an oil well is a difficult decision, because restarting it is immensely costly and complicated.
    
    • Moreover, if a country cuts production, it risks losing market share if other countries do not follow the suit.
  • Recently, OPEC has been working with Russia, as OPEC+ to fix the global prices and supply.
    
    • In 2016, OPEC allied with other top non-OPEC oil-exporting nations to form an even more powerful entity named OPEC+ or OPEC Plus.
• Reason for the Fall:
  
  • Resurgence in Covid Infections:
    
    • A recent resurgence in Covid-19 infections coupled with a decision by OPEC+ to increase crude oil production has contributed to a fall in crude oil prices.
      
      • OPEC+ has announced a phased withdrawal of production cuts which would see total crude oil production by the group of countries rise by 1.1 million barrels per day by July 2021.
  • Recovery in Supply:
    
    • The recovery in supply without a similar recovery in demand has contributed to the recent correction in crude oil prices and that supply cuts were difficult to maintain for oil-producing countries given the global macroeconomic situation.
      
      • Recent US data has also indicated that gasoline inventories are rising faster than the fall in crude oil inventories raising concerns of waning demand for petroleum products.
      • US crude oil production capacity has recovered to about 11 million barrels per day after abnormally cold weather in February 2021 forced US crude oil output down to 9.7 million barrels per day.
• Impact on India:
  
  • Current Account Deficit:
    
    • The decrease in oil prices will decrease the country’s import bill, and will help in reducing its current account deficit (excess of imports of goods and services over exports).
      
      • According to estimates, a one-dollar increase in crude oil price increases the oil bill by around USD 1.6 billion per year.
      • India imports 80% of its crude oil requirements.
  • Inflation:
    
    • The decrease in crude prices could also also further decrease inflationary pressures that have been building up over the past few months.
    • This will increase the space for the monetary policy committee to ease policy rates further.
  • Fiscal Health:
    
    • If oil prices would have continued to increase, the government would have been forced to cut taxes on petroleum and diesel which might have caused loss of revenue and deteriorated its fiscal balance.
    • The revenue lost will erode the government’s ability to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the Goods and Services Tax (GST) framework.

Source: IE

EUs Support to Southeast Asia: Climate Change

Why in News

The European Union (EU) has earmarked millions of euros for supporting climate friendly development in Southeast Asia.

• After the EU became a “strategic partner” of the Association of the Southeast Asian Nations (ASEAN) bloc in December 2020, both blocs pledged to make climate change policy a key area of cooperation.

Key Points

• EUs Assistance to Southeast Asia:
  
  • Multilateral Assistance:
    
    • The EU is the largest provider of development assistance to the ASEAN region, and has committed millions of euros to various environmental programs.
    • This includes 5 million Euros to the ASEAN Smart Green Cities initiative and another 5 million Euros towards a new means of preventing deforestation, called the Forest Law Enforcement, Governance and Trade in ASEAN.
  • Individual Help:
    
    • Along with multilateral assistance, the EU also works with individual ASEAN member states on eco-friendly policies like Thailand’s Bio-Circular-Green Economic Model and Singapore’s Green Plan 2030.
• Problems Faced by the EU in Southeast Asia:
  
  • Region’s environmental policy as Southeast Asia is going in the wrong direction in many areas on climate change.
  • Five ASEAN states were among the fifteen countries most affected by climate change between 1999–2018, according to the Climate Risk Index 2020.
• Coal Consumption in Southeast Asia:
  
  • Southeast Asia’s energy demand is projected to grow 60% by 2040.
  • Coal-fired energy will overtake natural gas as the main power source in the ASEAN region by 2030. And by 2040 it could account for almost 50% of the region’s projected CO₂ emissions.
    
    • In 2019, the region consumed around 332 million tons of coal, nearly double the consumption from a decade earlier, according to the International Energy Agency (IEA).
  • This will contribute to a two-thirds rise in CO₂ emissions to almost 2.4 gigatons, according to the Southeast Asia Energy Outlook 2019.
• Risks for the EU in Southeast Asia:
  
  • Could Face Exporters Anger:
    
    • If the EU takes a strong forceful stance on coal consumption in the region, it could spark anger from the main exporters of the commodity, China, India and Australia.
  • Policy Resistance:
    
    • The EU's climate change policy in the region has already been met with resistance.
      
      • Indonesia last year initiated proceedings at the World Trade Organization against the EU’s phased ban on palm-oil imports.
        
        • The EU contends the ban is to protect the environment, but Indonesia, the world’s largest palm oil producer, says it is mere protectionism.
      • Malaysia, the world’s second-largest palm oil producer, supports Indonesia in its battle against the EU.
  • Accusations of Hypocrisy:
    
    • The other problem for the EU is that it risks accusations of hypocrisy if it takes too forceful a stance on coal-fired energy production in Southeast Asia.
      
      • Poland and the Czech Republic of the EU remain dependent on coal-fired energy production.
      • Southeast Asia and Europe each accounted for around 11% of the world’s thermal coal imports in 2019.
• India’s Coordination with Asean on Climate Change:
  
  • In 2012 Both adopted a 'New Delhi Declaration on ASEAN-India Cooperation in Renewable Energy'.
  • ASEAN-India Green Fund was established in 2007 with USD 5 million for funding pilot projects to promote adaptation and mitigation technologies in the field of climate change.
  • ASEAN and India are collaborating on several projection Climate Change and biodiversity through partnership with IISc, Bangalore.

Source:IE

Monetary Policy Report: RBI

Why in News

The Reserve Bank of India (RBI) has released the Monetary Policy Report for the month of April 2021.

Key Points

• Unchanged Policy Rates:
  
  • Repo Rate - 4%.
  • Reverse Repo Rate - 3.35%.
  • Marginal Standing Facility (MSF) - 4.25%.
  • Bank Rate- 4.25%.
• GDP Projection:
  
  • Real Gross Domestic Product (GDP) growth for 2021-22 has been retained at 10.5%.
• Inflation:
  
  • RBI has revised the projection for Consumer Price Index (CPI) inflation to:
    
    • 5.0% in Quarter 4 of 2020-21.
    • 5.2% in Quarter 1 of 2021-22.
    • 5.2% in Quarter 2 of 2021-22.
    • 4.4% in Quarter 3 of 2021-22.
    • 5.1% in Quarter 4 of 2021-22.
• Accommodative Stance:
  
  • The RBI decided to continue with the accommodative stance as long as necessary to sustain growth on a durable basis and continue to mitigate the impact of Covid-19 on the economy, while ensuring that inflation remains within the target going forward.
    
    • An accommodative stance means a central bank will cut rates to inject money into the financial system whenever needed.
• Support to Financial Institutions:
  
  • RBI would extend fresh support of Rs. 50,000 crore to the All India Financial Institutions for new lending in Financial Year (FY) 2021-22.
    
    • National Bank for Agriculture and Rural Development (NABARD) will be provided a Special Liquidity Facility (SLF) of Rs. 25,000 crore for one year to support agriculture and allied activities, the rural non-farm sector and Non-Banking Financial Companies (NBFCs) - Micro-Finance Institutions (MFIs).
    • An SLF of Rs. 10,000 crore will be extended to the National Housing Bank for one year to support the housing sector.
    • Small Industries Development Bank of India (SIDBI) will be provided Rs.15,000 crore under this facility for up to one year for funding of Micro, Small and Medium enterprises (MSMEs).
  • All three facilities will be available at the prevailing policy repo rate.
• Review Committee for ARC’s:
  
  • Signalling the importance of Asset Reconstruction Companies (ARCs) to deal with bad loans, the RBI would constitute a committee to undertake a comprehensive review of the working of ARCs in the financial sector ecosystem.
  • The committee will recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector.
• Extension of Priority Sector Lending:
  
  • A six-month extension to September 30,2021 for Priority Sector Lending (PSL) classification for lending by banks to NBFCs for ‘on-lending’ to sectors that contribute significantly to the economy in terms of export and employment — has been approved.
    
    • On-lending means to lend (borrowed money) to a third party.
  • This would provide an impetus to NBFCs providing credit at the bottom of the pyramid.
• Government Securities Acquisition Programme (G-SAP) 1.0:
  
  • About:
    
    • The RBI, for the year 2021-22, has decided to put in place a secondary market Government Security (G-sec) Acquisition Programme or G-SAP 1.0.
      
      • It is part of RBIs Open Market Operations.
    • Under the programme, the RBI will commit upfront to a specific amount of Open Market Purchases of government securities.
    • The first purchase of government securities for an aggregate amount of Rs. 25,000 crore under G-SAP 1.0 will be conducted on 15^th April, 2021.
  • Objective:
    
    • To avoid volatility in the G-sec market in view of its central role in the pricing of other financial market instruments across the term structure and issuers, both in the public and private sectors
  • Significance:
    
    • It will provide certainty to the bond market participants with regard to RBI’s commitment of support to the bond market in FY22.
    • The announcement of this structured programme will help reduce the difference between the repo rate and the 10-year government bond yield. That, in turn, will help to reduce the aggregate cost of borrowing for the Centre and states in FY 2021-22.
    • It will enable a stable and orderly evolution of the yield curve amidst comfortable liquidity conditions.
      
      • A yield curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates.
      • The slope of the yield curve gives an idea of future interest rate changes and economic activity.

Source:IE