Crude oil, caught in a spiral of demand destruction due to the coronavirus spread and oversupply worries from the unravelling of the OPEC-plus arrangement, has faced a major rout. From about $65 a barrel in end-December, Brent oil has crashed to about $35 now — a level last seen in early 2016. The last two trading sessions have been particularly brutal for the fuel with Saudi Arabia and Russia, the prime players in the OPEC-plus group, refusing to extend their output cuts to stabilise already weak prices. This has heralded a price war for market share gains, with the Saudis firing the first salvo and the Russians expected to retaliate. The race to the bottom could result in many casualties among global oil producers, including the US shale oil industry.

For India, which imports more than 80 per cent of its oil needs, the price crash offers a breather on the macroeconomic front. Inflation, fuel subsidies, the import bill and the fiscal deficit could moderate, creating fiscal wiggle-room. The Centre, if it plays its cards well, can use this window of opportunity to give a leg-up to the economy. During the last major oil rout between mid-2014 and early 2016, the Centre and many States chose to appropriate most of the savings through regular hikes in excise duty and value-added-tax on petrol and diesel. Precious little of the cost reduction benefits were passed on to customers. This time around, the Centre must resist the temptation to raise taxes recklessly, and instead allow fuel prices at the pump to moderate meaningfully; this could help give a much-needed consumption boost to the economy. Gains that are retained, if any, should be used for productive infrastructure investments and not be frittered away on runaway revenue expenditure. There could be a flip side for India too from the oil price slump, as inward remittances from West Asia could moderate as those economies take a hit. The Centre’s plan to divest oil refiner BPCL, which has barely gotten off the blocks, could face renewed hurdles as potential bidders scramble to cope with profit pressures. It would also be a folly to assume that oil prices will always stay low. Oil is notoriously fickle, with multiple global factors and uncertainties at play. The Saudis and the Russians, for instance, could close ranks again to ease their economic pain, in which case oil prices can rebound from current levels.

It is imperative therefore, that India strikes while the iron is hot to safeguard its energy security. Irrespective of the recent price trends, the Centre should persist with measures to reduce the country’s oil dependency over the long run. It should strive to increase use of renewables, and catalyse a shift to electric vehicles. More effort should be put in to ramp up the stagnating domestic oil output. The country’s strategic oil reserves should be buttressed by making use of attractive buying opportunities in global markets.