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Oil Prices Rise

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May 08, 2018

What is the issue?

  • Crude oil prices have risen to their highest level since late-2014.
  • In this backdrop, changes to the domestic fuel pricing regime have raised some concerns.

What is the recent development?

  • Brent crude oil is the international benchmark price for oil.
  • It was priced around $27 a barrel as late as January 2015.
  • It has recently breached $75 per barrel.
  • The price rise is driven by a deepening economic crisis in Venezuela.
  • It is also a result of the fear of US's consideration on reimposing sanctions against Iran.

Why is it a concern for India?

  • The price of the Indian basket of imported crude oil, too, has risen sharply.
  • Worryingly, India primarily meets its energy needs through imports.
  • Oil imports rose by over 25% in 2017-18 to $109 billion from a year ago.
  • Elevated oil prices could affect India’s trade deficit.
  • Consequently, the current account deficit could also increase.

How is the domestic fuel pricing regime?

  • The Centre introduced the dynamic fuel pricing mechanism in June last year (2017).
  • This allowed oil marketing companies (OMCs) to revise fuel prices daily.
  • State-owned fuel retailers were revising the prices in tune with changes in international prices.
  • Notably, the price of Brent crude oil has increased by more than 50% since June last year.
  • It has risen to the highest level since late-2014.
  • Responding to this, the government has recently asked public sector oil companies to pause their daily retail price revision.
  • The oil companies have thus kept petrol and diesel prices unchanged for nearly two weeks.
  • This is despite the rise in average price of the Indian basket of crude oil.

What are the implications?

  • Oil companies - It has exerted pressure on the marketing margins of public sector oil companies.
  • The average marketing margin has considerably gone down by about 45%.
  • This would impact the oil companies as they may face a capital crunch.
  • India’s oil exploration and refinery upgradation efforts could slow down.
  • The performance of OMC stocks in the last few weeks also suggests that the markets are not convinced.
  • Policy - The government has discretionarily stopped a market-linked pricing regime.
  • Regardless of the reason, such an intervention undermines the credibility of its own policy decision.
  • Worryingly, the decisions are largely influenced by political considerations such as elections.
  • The policy of transferring the burden to the OMCs by offloading the burden on consumers is unsustainable in the long run.
  • The government should opt to ease the burden of fuel taxes.
  • A possible option is to bring domestic fuels under the purview of the goods and services tax.
  • For now, the government could bring down prices by reducing excise duties on oil.

 

Source: Business Standard, The Hindu

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