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Automobile sector could feel the heat of high fuel prices

Murali Gopalan | Updated on April 25, 2019 Published on April 25, 2019

Today’s price A fuel pump worker about to put up the rates in Chennai   -  THE HINDU

As US puts the squeeze on Iran, crude prices may see an upward spiral

It was a temporary reprieve and countries like India knew that the honeymoon would not last forever.

As the US has made it clear that oil imports from Iran cannot continue in its quest to ostracise the country, India will need to prepare for a new era of high oil prices. For now, crude is hovering at around $75 a barrel but if the US move gains traction, there is no telling how supplies will impact prices going forward.

Other nations in West Asia will be ready to take over from Iran but, in the interim, there is every likelihood of crude prices increasing sharply in the coming weeks. Within the oil industry, stakeholders are keeping their fingers crossed that it should not go beyond $90 a barrel since this could seriously impact economic growth.

Silver lining

The silver lining in the cloud is that there is very little likelihood of resisting the dark period of 2008 when crude prices went out of control and skyrocketed to nearly $150. This was the time when fuels were still part of the administered pricing mechanism which meant that they were heavily subsidised. In the process, this only increased pressure on government finances especially when the country is a huge importer of oil.

For the last few years, and particularly since the time the BJP came to power in 2014, oil prices have been prevailing at far saner levels compared to the dizzy highs of 2008. For a long while, they pretty much stayed put at around $40 before beginning to climb higher. Yet, this was still comfortable and allowed the Centre to deregulate prices of petrol and diesel, which meant that subsidies would now be a thing of the past.

Price gap narrows

As a result, the price differential between diesel and petrol has been narrowing down and this has had its fallout on customer behavioural patterns. During the days of generous subsidies, there was rapid diesel-isation taking place in the automobile arena, which saw a sharp fall in sales of petrol-driven cars. After all, diesel costed only a third of petrol and this was good enough reason to tilt the fuel scale preferences in the market.

With price deregulation, diesel is no longer the affordable/cheap fuel and coupled with the fact that diesel cars are pricier, petrol is back in favour all over again. Now with the added cost challenge coming in from Bharat Stage VI emission norms which will make vehicles dearer, the last thing the industry would want is an oil price shock.

It is no secret that car sales have been lacklustre in recent months even while there is hope of a turnaround happening after the election results are declared in end-May. Stability and consistency in policy is what the industry wants more than anything else and this is where the new government will have to do its bit in assuring stakeholders that all is well.

The bigger question, though, is coping with the prospects of high fuel prices. The optimistic scenario is that things may not go completely out of control despite the Iran issue and crude will stay in the $70 price bandwidth.

If, however, it does decide to play the spoilsport and start climbing towards levels of $80-plus, there is cause for concern. The Centre may choose to cut taxes even if this means taking a hit on revenue since the priority is to ensure that customer does not burn a hole in the pocket.

Other factors

Oil companies will also be hoping that things stay stable since they will be spending a lot of money on the BS VI conversion exercise at refineries. They need to recover their investments from sale of fuel and the last thing they would want is taking a hit on their margins especially if their owner, the Government, directs them to absorb a part of the price hike. There is a section of industry which believes that two-wheeler sales could soar, especially for entry-level motorcycles with good mileage. This segment has already been seeing rapid growth in recent months while scooter sales have hit a slump. High fuel prices will only shift more buyers to entry-level bikes (and compact cars) especially when they are up against a high price regime in the BS VI era.

Published on April 25, 2019
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