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With oil on the boil, the heat is truly on

Murali Gopalan | Updated on May 10, 2018 Published on May 10, 2018

Crude shock The Government will have to balance political and economic considerations with oil prices   -  The Hindu

The price spiral will hurt customers, oil companies and auto-makers alike

US President Donald Trump’s decision to pull out of the Iran nuclear deal will only stoke crude oil prices, which have been on a relentless rise in recent months.

This could have serious implications for the Indian automotive industry’s growth prospects, with petrol and diesel already burning a hole in customers’ pockets with no relief in sight. Perhaps, the only silver lining thus far is that the public sector oil companies have not revised auto fuel prices for some days.

This, in turn, is a sorry reflection of the reality of politics overruling economics. After all, both petrol and diesel are out of the administered pricing mechanism, which means they are completely deregulated and devoid of the subsidy element.

The trio of IOC, BPCL and HPCL has the discretion to revise prices on their own and have, in fact, been doing this on a daily basis for a while. The fact that they have not done this lately clearly means that their owner and largest shareholder, the Government, has perhaps subtly indicated this can wait.

Political considerations

In all fairness, there has been no official confirmation on such a move but going by past experience, it is reasonable to assume that hiking prices during elections is not a good move, politically. After all, there are high stakes in the Karnataka political arena and the last thing the voter needs is to be faced with the prospect of paying even more for petrol or diesel.

However, oil companies are the biggest casualties in the bargain since they will have to absorb the losses arising from this decision. How long this will continue remains to be seen, though the pain will increase with every passing day. The best option is for the Government to reduce excise duty on petrol and diesel. It is quite likely this will happen soon, unless crude prices miraculously start falling in the coming days. There is no chance of this happening in a hurry especially with the present state of geopolitical tensions in West Asia.

What does all this mean for the automotive industry? The fiscal has started on a bright note with all user segments right from two-wheelers and cars to trucks and tractors firing on all cylinders. In addition, the construction equipment business has never had it so good either, which clearly means that infrastructure activity like road-building is on in full swing.

Customer concerns

Customers have, of course, been coughing up more for petrol and diesel during this time. Despite this, they are coping reasonably well though their endurance levels could be tested if prices continue to increase. This will be particularly difficult in the cargo-carrier space, which essentially uses diesel for trucks and buses and, therefore, has the propensity to stoke inflation.

In a way, car and two-wheeler buyers are also getting used to the idea of market realities in fuel pricing, quite unlike the not-so-distant past when the concept of subsidies played havoc with the consumption pattern. Till about five-six years ago, this led to massive ‘diesel-isation’ of the car industry since there was an appreciable price difference between petrol and diesel to the tune of nearly ₹25/litre.

No wonder then that customers made a beeline for diesel cars while petrol was given the royal cold shoulder. The idea of a diesel subsidy was largely intended for trucks and buses, which carry products and the common public, but car buyers also queued up for the cheaper fuel.

It was only after small price hikes began happening every month, followed by total deregulation, that the price differential between petrol and diesel reduced considerably.

The halo is gone

As a result, diesel has lost its halo in the car space even while it remains the preferred fuel in the booming SUV segment. Customers here are reasonably affluent and will not mind paying up more to get that added zing that only diesel can ensure for long distances.

In cars, it boils down to operating costs and city commutes, where petrol is the more pragmatic option.

The Government has done well not to revisit the subsidy era by keeping the spirit of deregulation intact. Of course, the biggest boon was low crude prices globally compared to the difficult times of 2008-2009 when they touched levels of nearly $150 per barrel.

There is no chance of that happening now though the truth is that crude is largely a ‘political commodity’ whose pricing can take unpredictable twists and turns.

‘Freight-ful’ impact

More than cars and two-wheelers, the big concern is the impact of costly fuel in the B2B space since this will translate into higher freight rates. The trucking community will naturally have to cover its costs and protect wafer thin margins if it needs to stay afloat.

Costly diesel can wreak havoc and this is why it becomes imperative for the Government to reduce excise duty.

Oil companies, similarly, cannot continue to function without hiking prices since they will be the net losers. They also need to invest considerable sums of money on Bharat Stage VI auto fuels in their refineries.

Officially, this is due to be implemented in April 2020, though a beginning has already been made in Delhi and the adjoining region. The next step is to have this ready across northern and central India before the south and east join the list.

Auto-makers will also need to access this cleaner fuel six months in advance for their testing and validation procedures, which means a marathon exercise will be needed in the next 18 months. Like oil companies, they will also be spending big sums of money on BS VI technology.

In short, this means that the customer will need to be ready for a high price regime from 2020. Hopefully, crude prices will have fallen by then to make up but nobody really can predict at what level they will be.

The top priority, meanwhile, is to ensure that deregulation of prices continues while protecting interests of the oil companies.

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Published on May 10, 2018
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