Even though there are only a few nations that produce oil for export, the spot market for oil is unusually hard to track and predict. In the recent past, the arrival of shale oil or Light Tight Oil in the market created a downward pressure on prices. On the demand side the weaker global growth, particularly of China, was also a contributing factor to the downward pressure. Now, some of the latest reports suggest a further fall in oil prices to around $40 a barrel from the current level of around $48 a barrel. In short, the oil market is heavily oversupplied. Indeed, prices should have fallen at an even faster rate, given the extent of overproduction with the Organization of the Petroleum Exporting Countries, The United States of America and now Iran surging ahead with their production plans. The output projected for Brazil and Russia also turned out to be underestimated. The puzzle of prices being relatively sticky, given the excess supply, can be explained by two market reactions on the demand side. With lower prices, many large economies including China and India are stocking up. Hence, importing countries' inventories are piling up.

In the US, the demand for oil is particularly price elastic, with even a little drop in oil prices leading to a large rise in quantity demanded. This rise in production cannot go on indefinitely since the by-products of petroleum production will be hard to sell. Hence, margins will fall and a floor will be reached. The LTO segment is the one most likely to react to falling prices because the adjustments can be done relatively fast and cheaply. The production of this sector has declined steeply from May, 2015. Oil exporters can have their own share of woes triggered by falling prices and revenues. The oil market is an oligopoly driven by complex forces of competition, collusion and geo-political factors creating a host of uncertainties. For India, this is all good news since a fall in dollar prices of oil will reduce the import bill, allowing for lower domestic prices and a reduction in the government's subsidy bill. This, in turn, would free expenditures, both private and public, for other goods and services. This boost in spending is necessary at the current moment to help increase aggregate demand. This is, of course, subject to the fact that the rupee remains stable and does not depreciate for any reason. The Reserve Bank of India needs to keep a keen eye on exchange rate movements. Even without cutting rates, it could contribute to growth.