Fuzzy forecasts

An audible sigh of relief has gone around Indian economy watchers at the unexpected retreat in global oil prices. With near-month Brent crude slipping to $60 a barrel, oil prices have now corrected by over 30 per cent from their highs of over $86 in early October. With oil doing an about-turn, economic commentators now seem to be willing to take a more sanguine view of India. If oil prices stay at these levels, they predict, India’s current account deficit is expected to stay below the 3 per cent mark, inflation will stay benign and the rupee will hang on to its recent stability against the dollar. Commodity forecasters who were predicting that oil would soar above $100 a barrel have also gone noticeably quiet with new voices piping up to predict a new bear market in oil. But it would be quite unwise for both the government and investors to relax their vigil on oil prices, as all these forecasters have proved notoriously bad at calling oil price direction in the past.

Market watchers like to assign fundamental reasons for oil’s whimsical swings in the global markets. So, while the earlier flare-up was attributed to US sanctions on Iran tightening supply, commentators are now ready with post facto explanations for the cool-off — from concessions on sanctions by the Trump administration, to rising US oil inventories and the possibility of the oft-predicted Chinese recession. But given that speculative positions built up by hedge funds play such a big role in oil price moves, it would be best to take all this with a pinch of salt. In any case, the fraught relationship between the US and Saudi Arabia, debates around production cuts in the December OPEC meet and the onset of winter demand look set to keep the oil markets on tenterhooks in the weeks ahead. The Indian government should thus persist with its efforts to shield the economy against oil price shocks, by pushing oil companies to hedge proactively against price risks, ironing out wrinkles in its new exploration policy and building up strategic petroleum reserves.

As usual though, Indian consumers do not seem to be reaping the benefits of oil’s retreat, with fuel price cuts by oil marketing companies since October lagging well behind the decline in global prices. Part reason for this of course is persisting high Central and State levies on fuel. But it is also quite possible that, this time around, oil companies are building a buffer into their selling prices in anticipation of calls by the Centre to take populist price cuts ahead of elections. In breaking with its stated policy of decontrolled fuel prices and asking oil marketing companies to ‘absorb’ part of the fuel price cuts in October, the Centre has introduced an element of arbitrariness into domestic fuel pricing and done consumers a disservice. The leeway provided by retreating global prices should be used to re-align local fuel prices with market trends.