Hike in Oil Prices
OPEC — Organization of Petroleum Exporting Countries
Until the mid-twentieth century, the United States was the world’s leading oil producer and had complete control over oil pricing. In the years that followed, the OPEC acquired control of the oil markets and pricing. It’s a council of 13 countries established to address oil price and production issues. In 2016, it allied with other top non-OPEC oil-exporting nations to form an even more powerful entity named OPEC+ or OPEC Plus. As of 2018, its member countries held 79.4% of the world’s proven oil reserves. OPEC countries produced about 40% of the world’s supply.
Price hike in India
India is one of the world’s largest oil importers. It imports about 80% of its overall oil requirements which makes up a third of its total imports. As a result, the price of oil has a significant impact on India. The value of its imports would be lowered if prices fell.
In the past few months, the oil price in India has seen an exponential hike, and in many states, the price has crossed the Rs. 100 per litre mark. The price rise can be directly related to the increase in oil prices in the global market, as oil production has been reduced. Moreover, oil-producing nations are looking for higher profits, resulting in consumer countries suffering from higher oil prices. In recent years, India’s gasoline consumption has also increased. Indians are spending more on vehicles and electronics as their population grows and per capita income rises. As a result of the rise in consumer demand, fuel costs have skyrocketed. In the year 2004, the Government of India deregulated oil prices. It started using the dynamic pricing system, i.e., the prices in India are affected by the prices in the global market, and the government does not directly control them.
What the government says
Then one may ask, when there were hostile oil prices in the worldwide market, why were the costs in India not reduced for customers? This was primarily because the government increased central and state taxes, which offset the fall in crude oil prices for the end consumers. Hence, the consumers had to bear the brunt of the increased taxes, and they ended up paying higher prices for petrol/diesel despite a fall in international crude price.
The government claims that the recent hike in oil prices is due to the oil bonds issued to the oil companies worth Rs 1,34,423 crores in 2014. But as per the statistics, only two bonds matured in 2015, for which the government paid Rs. 3500 crores, and around 1.3 lakh of oil bonds were still due. Since then, no bonds have reached their maturity date, and thus the government did not have to repay any of the oil bonds to date except the interest for them, which amounts to Rs. 10,000 crore per year. However, if we look at the amount of money the central govt earns through the excise duty, then the govt made around Rs. 1.54 lakh crores in 2015–2016 through excise duty in just a single year which alone can pay all the oil bonds. The government’s excise duty collection jumped by 88% in 2020–2021, collecting Rs. 3.35 lakh crore, making their argument baseless.
Impacts of Price hike
Following are the different impacts that the hike in oil prices have created in the Indian economy:
Primarily, it resulted in higher prices. India imports 1.5 billion barrels of crude oil each year and sums up to approximately 86% of India’s annual crude oil requirement. So, an increase in crude oil prices could increase India’s expenditure, thus adversely affecting India’s fiscal deficit, which is the difference between India’s total income and expenditure. A rise in the fiscal deficit could negatively affect the economy and increase import dependence.
In addition to that, it had a massive impact on the Indian rupee. With the increasing oil prices, the government has to exchange rupees for dollars, and if we consider the import bill to be doubled compared to last year, it will put tremendous pressure on the rupee. The result will be a further severe drop in the value of the rupee, creating a dangerous pattern that will bring the economy to a grinding halt.
To add more, it has affected stock values too. Since many Indian companies are dependent on crude oil prices, the profitability of these companies changes because of higher input costs and afflicts stock prices to change negatively.
Finally, higher fuel prices are taking a toll on the Indian consumer. On the one hand, their salaries are not rising because there is a recession in several industries in the market. On the other hand, the rise in fuel prices consumes a large part of their annual income. Rising fuel prices are leading to significant inflation. Hence, their discretionary spending is also being lowered.
On the whole, many sectors of the Indian economy are dependent on the prices of fossil fuels. For instance, the automobile sector is a significant contributor to employment in the country. However, the prices of fuels have risen so much, and people are refraining from buying any new cars. The fuel price impacts the profit margins of automobile companies, indirectly having a spillover effect on other sectors of the economy.
Current Market Senerio:
Russia and Ukraine are engaged in a war currently, leading to heavy price fluctuations in oil prices. Russia is the third-biggest oil producer globally, behind the US and Saudi Arabia.
It exports about five million barrels of crude oil each day, more than half of that goes to Europe. Due to sanctions imposed by the USA, Russia has been blocked from using SWIFT payments and exporting oil. Since it is the 2nd largest oil exporter worldwide, the oil price has gone up to $139 from $89 per barrel. Due to this, petrol and diesel prices could suffer a sudden hike of Rs. 15 to 20 in India.
With the economy bouncing back with a V-shaped recovery, the fuel demand is expected to increase, forcing global crude producers to increase production. The government would have to reduce the revenue to keep the fuel price under control and, in turn, reduce the load on the consumers.