Crude oil prices vary significantly due to several variables, including macroeconomic shocks, supply-demand imbalances, and geopolitical events that have a substantial economic impact. These factors are usually seen as indicators of the state of the global economy. These variations can become increasingly unpredictable during an economic downturn, which can have a big effect on individual countries as well as the world economy, especially big oil importers like India.

• Economic slowdowns reduce oil demand, lowering oil prices, but recoveries cause prices to rise quickly, fueling inflation.
  

• Global conflicts disrupt oil supply, raising prices and inflation in oil-dependent countries like India. Geopolitical tensions can significantly impact market stability.

• Rising oil prices hurt India by increasing inflation, weakening the rupee, and widening the fiscal deficit.

• Higher oil prices negatively impact sectors like transport and manufacturing, leading to decreased investor confidence, while oil producers often see gains in their stock prices.

Here are some of the major factors that can influence the prices of crude oil:
 

1. Supply and demand dynamics

The demand for oil drops during economic crises because there is usually an abrupt decline in economic activity. Significant declines in the demand for crude oil have historically occurred in response to catastrophes like the global transportation slowdown, the 2008 financial crisis, and the COVID-19 pandemic of 2020. Crude prices typically drop rapidly as a result of this mismatch between supply and demand.

For example, the 2020 pandemic caused crude oil futures to briefly go negative, indicating the extent of demand decline. On the other hand, as economies recover after a crisis, price recoveries typically occur quickly, which can put pressure on inflation worldwide.
 

2. Geopolitical instabilities

Geopolitical tensions frequently accompany or intensify economic crises. For instance, the 2022 Russia-Ukraine conflict caused a great deal of instability in the oil markets. Sanctions imposed on Russia, a major supplier of oil, decreased the amount of oil available on the world market and raised prices. This led to inflationary pressures in significant oil-importing nations, such as India, where consumers were severely affected by inflation.
 

3. Inflationary pressures

Inflation is often triggered by rising crude oil prices during periods of economic recovery, showcasing the broader economic impact of fluctuating oil prices during geopolitical unrest. A wide range of things, including consumer goods and necessities like food, become more expensive to produce when oil prices rise. Moreover, rising transportation expenses contribute to general inflation. A $10 increase in crude oil prices can result in a 0.3% increase in India's Consumer Price Index (CPI), which would greatly contribute to inflation.
 

4. Impact on India's economy

The rising cost of crude oil poses several economic issues for India, a country that imports a majority of its oil needs. Inflationary import bills for the government, a weaker rupee, and a rise in the current account deficit are all caused by rising oil prices. The economic impact may result from this, compounding fiscal imbalances. The fiscal deficit can grow by ten basis points for every $10 increase in crude oil prices.
 

5. Stock market and investment sentiment

As with most worldwide markets, the Indian stock market is adversely affected by rising crude oil prices. Investor confidence decreases as a result of declining corporate earnings in industries heavily dependent on crude oil, such as manufacturing, transportation, and aviation. But other industries do gain from increasing oil prices, such oil production and exploration. During these times, industries like airlines and paint manufacturers see higher input costs, whereas companies like ONGC and Oil India often experience increases in their stock prices.

Although there is usually not much long-term association between crude oil prices and stock market performance, investor fears of inflation and decreased profitability across industries are the main causes of the stock market's volatility amid spikes in crude oil prices.
 

6. Currency depreciation

The Indian rupee is negatively impacted by rising crude oil prices as well. India needs to buy US dollars to pay for its oil imports because the commodity is traded worldwide in US dollars. The Indian currency depreciates as a result of increasing oil prices since more rupees are required to purchase the same amount of oil. Increased import costs due to this depreciation increase inflation.​

Global crude oil prices are greatly impacted by economic crises, and this has a knock-on effect on countries' economies such as India's. Currency depreciation, inflation, and stock market volatility are significant consequences of changes in the price of crude oil. In times of crisis, investors must manage their portfolios by understanding the cycles of these market changes and their wider economic impacts. Understanding the relationship between oil prices and their economic impact is crucial for investors and policymakers.