As crude prices may move unabated; alert for average household, governments intervention warranted

Oil Refinery Industry
The nearterm outlook remains strong and prices may touch USD 100 a barrel; some intervention from government could help ease burdens on the Indian households

Crude oil prices are at a multi-year high and the near-term outlook does not inspire much confidence among the common households. The prices are expected to touch levels between USD 95 and USD 100. This means that we are staring at a situation where household budgets could see a further hitowing to high petrol and diesel prices that would spiral prices of almost everything for consumption.

The cooking gas, be it Liquified Petroleum Gas (LPG) or the Piped Natural Gas (PNG), will be hit with a double-whammy.

Thanks to a sharp dip in the food price inflation, Indiaregistered a five-month low of Consumer Price Index or CPI inflation in September. The food inflation basket eased to 0.68 per cent in September 2021, down from 3.11 per cent in August. At 4.35 per cent, it was down sequentially (CPI inflation in August 2021 stood at 5.30 per cent) and on the year-on-year (yoy) basis. Retail inflation in September 2020 was at 7.27 per cent.

The rural CPI inflation was 4.13 per cent while the urban CPI inflation was 4.57 per cent.

Will the party last? It looks unlikely in the near term. The prices of commodities are closely linked with fuel prices.

India meets over 80 per cent of its crude oil demand from imports and the oil import bill was USD 57 billion or 2.1 per cent of GDP in FY21, according to a report. The crude prices have gone up by over 30 per cent from August lows and are near three-year highs.

If the crude oil prices continue to go up, India’s Current Account Deficit (CAD) may also go up and rupee would weaken in that situation. Many media reports have been suggesting that the rupee may fall to levels around Rs 78 in the near term. The danger of high inflation is lurking now more strongly.

The cost of natural gas remained unchanged for six months before the government finally decided to bite the bullet amid international rates hitting the roof now. It increased the price of natural gas by a whopping 62 per cent with effect from 1stof October from USD 1.79 mmBtu (million British thermal unit) to 2.9 mmBtu under the domestic gas price regime, which was introduced in 2014.

Meanwhile, the ceiling price for gas from difficult fields such as deep water, ultra-deep water and high pressure-high temperature areas for October-March was increased to USD 6.13 per mmBtu from the earlier price of USD 3.62 per mmBtu.

The revised price will be applicable till 31st of March 2022. The price of domestic natural gas which is supplied by explorers Oil and Natural Gas Commission (ONGC) and Oil India Limited (OIL) is revised bi-annually.

Government’s Stance

While, India has expressed it displeasure over the spiralling prices, asking the OPEC to keep prices around USD 70 per barrel, the world’s third largest consumer of crude oil has also pointed to the hurdles in the global economic recovery if the prices are not brought down soon.

The Union Minister for Petroleum and Natural Gas Hardeep Singh Puri, in his closing remarks at India Energy Forum by CERAweek said that the green shoots of global economic recovery would be severely impacted if the prices of crude oil were not maintained at sustainable levels.

The remark comes in the wake of oil producers’ cartel the Organisation of the Petroleum Exporting Countries and its allies (together known as OPEC+) decision to shrink supplies to keep the rates artificially high. When lockdowns are easing and the economy is opening and demand growing, high prices of fuel are hurting and would hurt even more, if a lid is not put on the growing international prices.

The ongoing energy crisis amid growing demand for fuel has only acted as a catalyst. The oil reserves are dropping swiftly with storage tankers’ levels deteriorating. The indications are that it could weaken further and jack up prices.

This is in contrast to last year’s situation when plummeting demand lead to crash in prices of crude oil. The US West Texas Intermediate (WTI) prices dropped to record negative levels.

The demand situation vanished suddenly, leading to a supply glut, which forced oil producing companies to store oil in tankers in the sea.

In India, the price of petrol has once touched Rs 106 per litre in Delhi and got even dearer in Mumbai shooting past Rs 112. Likewise, diesel price is swiftly approaching the Rs 100 markin Delhi while it has already crossed Rs 105 per litre in India’s financial capital.

While we have a long festive season ahead of us, it will be interesting to see at what stage the government intervenes to give a much-needed reprieve. In the event of prices not coming down, the only way to control rising prices is by way of cuts in central excise duty and Value Added Taxes (VAT) levied by the states.

Touching fuel prices may unsettle its revenue receipts as wellat a time when the economy is giving mixed signals. Whether governments at states and the Centre are ready to take that hit and its timing is to be seen.

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