Persistently high oil price a key risk

Boiling oil price has definitely put the government’s number crunchers on a high alert as it will have a direct impact on the Budget. A question on everyone’s mind is what is the crude price that would make Jaitley, domestic oil refiners, oil producers, as well as the consumers happy?

Voicing his concern Chief Economic Advisor, Arvind Subramanian, in the Survey, said the persistently high oil price (at current levels) remains a key risk for the country and it would affect inflation, current account, fiscal position, growth, and force macroeconomic policies to be tighter than otherwise.

He further noted that the average oil price as forecast by the International Monetary Fund will be 12 per cent higher in 2018-19, which will crimp real incomes and spending — assuming the increase is passed on as higher prices, rather than absorbed by the Budget through excise tax reductions or by the oil marketing companies.

The price at which Indian refiners bought their crude stood at $68.11 a barrel on January 26 and $68.78 a barrel on January 25. The average price for the current fiscal — April 2017 to January 26, 2018 — was $54.83 a barrel, inching close to the average of $55-$60 a barrel taken by the government for the full fiscal.

The oil industry would prefer a stable price or a ‘goldilock range’ between $60 and $70 a barrel. Goldilock range is the price range at which both the seller and buyer are happy.

Retail price

But, it is the retail price that becomes a politically sensitive issues. While the Ministry for Petroleum & Natural Gas would like the Finance Ministry to reduce the excise duty on auto fuels, the later is not always willing as it is one of the key revenue generators.

Almost half of the retail price is various duties and other levies, including excise duty. For instance, the retail petrol price in Delhi is ₹72.48 a litre which includes ₹19.48 a litre of excise component. Similarly for diesel, at the retail price of ₹63.93 a litre, the excise duty is ₹15.33 a litre.

Partner at Deloitte, Debasish Mishra, said, “If the price of crude oil goes up by a dollar or the rupee weakens against the dollar by a rupee, there is a need to increase prices by almost 45 paise per litre in order to maintain margins. Unless that is implemented, it starts affecting the retail margins of oil marketing companies. Beyond that, the government may revert to days of upstream companies absorbing some of the impact. This is assuming that the excise is not rolled back,” he added.

Risk to price

Highlighting the risks, the CEA said, there are the usual geo-political and geo-economic risks: war in the Korean peninsula; political upheaval in West Asia; aggressive output cuts by Saudi Arabia (and Russia) in advance of the planned listing of the Saudi Arabian oil company, Aramco, which could force oil prices even higher.

But, Associate Fellow, Observer Research Foundation, Kabir Taneja, believes, “The rise of crude prices cannot be directly attributed to growth-political situations that have cropped up over the past few years, such as the rise of ISIS or the civil wars in Yemen. Despite these circumstances, oil trade routes inwards and outwards of the region have remained safe and intact.”

“However, the building situation of regional supremacy between Iran and Saudi Arabia and building diplomatic spats such as the one between Saudi Arabia and Qatar could have an impact on crude prices in the time to come. Despite all this, the resilience of oil prices against the supposed geopolitical risks is not an anomaly, but unsaid appreciation of mutual interests between the warring parties in the region,” he added.

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