Automakers face challenge of high fuel prices

Since 2014, crude oil prices have been averaging $50 per barrel, which has been the best piece of news to both oil companies and the auto industry.

After all, this was a welcome relief from the scary period of 2009 when global prices were nearly thrice as much and public sector oil companies found themselves on a sticky wicket with losses on subsidised fuels mounting by the day.

Raising prices was also not the easiest of tasks since this would have been a huge blow to customers and the Centre was forced to compensate the oil companies from the Budget.

With petrol also emerging the more expensive fuel, the market made a huge beeline for diesel and companies such as Honda Cars, which only had petrol options suffered. By the time the company was ready with its own diesel engine, global prices had also receded from their scary highs. This also allowed the Centre to go in for price deregulation of petrol and diesel, which effectively meant that the subsidy era was now history.

This was good news to the oil companies too, which could now fix prices on their own instead of being constrained by the overwhelming presence of APM (administered pricing mechanism). Customers began getting back to petrol cars with the price differential versus diesel not being as significant as it was in the past.

This honeymoon phase now seems to be coming to an end with crude prices now higher though nowhere close to the stratospheric levels of 2009. Experts do not think they will go beyond $80/bbl either in the coming months though there is no telling what could happen. After all, oil is a political commodity whose prices could fluctuate wildly in the event of strife or natural calamities.

This is when the Centre will have its work cut out in meeting the challenge of rising prices. At one level, customers will need to get used to the idea of market-determined prices except that this will also happen at a time when jobs are still elusive in the market.

When people are struggling to keep their household budgets intact, high fuel prices may just end up being the proverbial last straw.

It is also important at this point in time for the PSU oil companies to manage the situation on their own except that this is easier said than done. After all, the Centre is their largest shareholder and may prevail upon them to keep prices in check. This may not be a particularly good option since it will only lead to more losses, which will then need to be squared up by the Centre.

Automakers will also be hoping that the oil price spiral does not get out of control. After all, high fuel prices could deter car purchases with potential customers likely to wait for things to settle down. For now, there is no cause for alarm with crude at $70/bbl but any price spike beyond $80/bbl may set alarm bells ringing.

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