Hyderabad: In recent times, fuel prices have become rock steady and there was no revision of prices. Does it mean the international crude oil prices have become stagnant? Not necessarily! On the contrary, the crude oil prices are skyrocketing and are almost touching $100 per barrel. Currently, the price is hovering around $96-97, breaching the […]
Hyderabad: In recent times, fuel prices have become rock steady and there was no revision of prices. Does it mean the international crude oil prices have become stagnant? Not necessarily! On the contrary, the crude oil prices are skyrocketing and are almost touching $100 per barrel. Currently, the price is hovering around $96-97, breaching the all-time high of 2014. And yet domestic fuel prices have not seen a jump for the last 102 days.
You guessed it right! It may not be the largesse of the Central government on the populace, but the stagnation in fuel prices in the country is a direct result of the ongoing elections in Uttar Pradesh, Uttarakhand, Punjab, Goa and Manipur, where the Bharatiya Janata Party (BJP) is staking all claims to retain its position. And once the elections are over on March 7, it is almost certain that the fuel prices would shoot through the sky, if the current prices are any indication.
The threat of the Russian invasion of Ukraine is already shaking up the global crude oil market and yet fuel prices are stagnant in the country. To be precise, the last revision of fuel prices was in the first week of November last, when the Central government reduced the excise duty on petrol by Rs 5 per litre and diesel by Rs 10. By then it was clear that the election schedule would be declared for the five States. With polls in the five States being billed as a mini general election, the BJP has much at the stake. And the oil companies, which were hitherto impervious to the common man’s suffering on account of fuel price hikes, have now been grinning and bearing the pain.
Mind you, the crude oil prices, which were around $65 per barrel on December 1, 2021, shot up to nearly $96 per barrel on February 14, 2022. And yet courtesy of the ongoing elections, we have not seen any upward revision of fuel prices. If global prices breach $100 a barrel, people should be ready to bear a huge spike in fuel prices in March, post elections, as India imports about 85 per cent of the oil needs. Once the elections are over, there will be a significant hike in fuel prices, according to CapitalVia Global Research.
Though international oil prices increased $12 per barrel since November 4, the domestic fuel prices, which depend on international rates remained unchanged, and the oil companies had been incurring losses at the rate of Rs 8-10 per litre since then. They will hike prices after the elections, to make up for the losses incurred, which will seriously impact inflation. The prices are thus dictated by politics, not economics, experts argue.
Like in the past, as soon as the polls are over, prices start getting revised and retail prices start adjusting to the international prices, India Ratings & Research observes. Once the prices go up, there will be an impact on inflation.
As per the RBI’s survey of professional forecasters, CPI inflation is seen averaging 5 per cent in FY23 and questions have been raised about the price of crude oil assumed by the central bank in its forecast. Despite crude oil prices rising over $90 per barrel, the Reserve Bank of India (RBI) has projected a lower retail inflation level of 4.5 per cent in the next fiscal, 2022-23, as against the inflation forecast of 5.3 per cent for 2021-22.
As per the RBI’s Monetary Policy Report released in October 2021, the central bank had assumed $75 a barrel as the price of India’s crude oil basket for the second half of FY22 (October 2021-March 2022). However, oil prices have been climbing and hit seven-year highs, with March 2022 crude oil futures reaching as high as $94.66 a barrel last weekend.
Oil price directly impacts the economy, particularly as it is used in the transportation of goods and services. Oil price increase leads to an increase in prices of all goods and services, and as result, inflation also rises. A high inflation is bad for an economy and industry also suffers due to the rise in input costs. Also remember the impact on the industry, which is already facing pandemic-induced challenges. There could even be an impact on the current account deficit.
ICICI Direct Research expects the rupee to depreciate on elevated crude oil prices and persistent FII outflows. Furthermore, elevated inflation has pushed major central banks worldwide to tighten monetary policy, which, in turn, may prompt foreign investors to pump out liquidity from emerging markets.
Import dependency
India is not self-reliant on crude oil production and is heavily dependent on imports to bridge its demand-supply gap. The hike in international crude oil prices will increase import costs and raise the country’s crude basket price. Every $10 increase in oil price will hurt India’s economic growth by 0.3 per cent to 0.35 per cent.
Goldman Sachs sees Brent prices at $90 per barrel in the first quarter of 2022, $95 in the second quarter and $100 per barrel in the last two quarters of the year. It raised its Brent oil price forecasts for 2022 to $96 and 2023 to $105 per barrel from $81, $85 per barrel, respectively.
Geopolitical factors
Geopolitics has a major impact on oil prices. The tension between Russia, which is the second-largest oil producer worldwide and Ukraine, raised fears and escalated energy prices globally. Drone attacks on oil facilities in UAE in January and an outage on a major oil pipeline connecting Saudi Arabia and Turkey added pressure. All this at a time when the world was witnessing a growth in oil demand on par with pre-pandemic levels. And oil producers are finding it hard to ramp up production. Members of the cartel OPEC continue to fall short of monthly targets. Supply is estimated to be at least a million barrels per day short of the target.
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