Time to give relief to consumers on oil prices

Oil prices
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Petrol and diesel prices today

Highlights

Petrol and diesel rates reached record highs placing a burden both on consumers and transport industry

Oil prices are rising rapidly at the retail level. Petrol and diesel rates have reached record highs recently placing a burden both on consumers and the transport industry. The reason for the sudden uptick, according to the public sector oil marketing companies, is owing to firming up of global crude oil prices. This is only partly true. Consumer prices of petrol and diesel are much higher than they should be if based on a linkage with international market prices. The fact is, as much as 60 per cent of the cost of petrol and diesel is due to high taxes.

Much of this tax burden was imposed last year in April when global oil prices crashed owing to the world wide pandemic and sudden fall in demand. From 70 dollars per barrel in September 2019, the benchmark Brent crude prices fell to about 18 dollars per barrel in April 2020.

This should have led to a matching decline in domestic prices as petrol and diesel are supposed to be linked to world prices. Instead, the government decided to mop up resources, recognizing that the lockdown would mean a decline in revenues during the rest of the year. It went ahead to raise excise duty on petrol and diesel by Rs. 13 and Rs. 15 per litre respectively. This had a minimal impact on consumers at the time as the overall retail price did not change. The benefit was due to the base price having fallen owing to the dip in world markets.

The global crude oil scenario has changed vastly since then. Prices are now hardening in anticipation of widespread vaccinations and resumption of normal economic activity bringing about revival in demand. Brent crude prices which had been hovering around Rs. 40 to 45 dollars per barrel over the last six months are now over 50 dollars per barrel. Currently prices have spiked to 56 dollars per barrel, leading to the latest round of petrol and diesel prices hikes in the domestic market.

The international oil markets still have large inventories though these are recently reported to have been drawn down by 5.8 million barrels, much higher than anticipated earlier. The last meeting of the oil cartel, the Organisation for Petroleum Exporting Countries (OPEC) along with Russia, resulted in Saudi Arabia announcing further production cuts. Saudi Arabia is one of the biggest oil exporters and reducing output is one way of boosting prices. Along with the vaccination news, this has led to a growing bullishness in the market.

As for the coming year, it looks as if oil prices will continue to rise in tandem with the pickup in the global economy. Share prices of oil majors like Exxon, Shell and BP have already gone up in the past few weeks in the hope that consumption will continue to rise. Even in India, which is the third biggest importer of crude oil in the world after China and Japan, consumption has risen back to pre-Covid levels. Hopes are being pinned on the effect of widespread vaccinations, stimulus packages unveiled in many countries and the fact that Saudi Arabia has agreed to cut output. The cumulative effect of these factors is expected to result in oil prices reaching nearly 60 dollars per barrel by the end of 2021.

For India, hardening of world oil prices is never good news. It needs to be remembered that the country imports over 80 per cent of its fuel needs and oil comprises the biggest chunk of its import bill. The cost of oil imports was 102 billion dollars in 2019-20. It will be far lower in the current fiscal with one projection being 65 billion dollars. This is partly due to falling world oil prices and partly due to decline in oil products consumption owing to the lockdown and disruption in economic activity.

It cannot be denied that this is a year when the government needs to marshal all available resources, given the fact that industrial output had been disrupted during the lockdown and revenues are lower than ever before. It also has to try and balance the forthcoming budget, even if the fiscal deficit is allowed to widen considerably. But the increase in excise duties on petrol and diesel has raised prices steeply for consumers at a time when many are undergoing severe hardship owing to the fallout of the pandemic. The impacts will also being felt on prices soon as inflation may have eased to 5.9 per cent in December but this follows a rise to 7 and 7.6 per cent in the previous two months.

It is time for the government to give some relief to consumers by curbing further price hikes of petrol and diesel at the retail level. While it may not be possible to roll back the existing rates of excise duty on these oil products, at least the burden of rising international oil prices should not be placed on consumers. This should be borne by the exchequer for the time being. The consumer has already faced nearly ten months of stress and strain during the pandemic and unemployment levels have been rising despite the revival of economic activity. It is now high time to provide some relief to the common man and also reduce inflationary pressures on the economy.

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