Home FEATURED NEWS India in for another oil price shocker- The New Indian Express

India in for another oil price shocker- The New Indian Express

0

[ad_1]

Express News Service

We are in for another global oil price shocker. Last week, major oil-producing nations favoured price over stability and announced production cuts next month. This, coupled with the European energy sanctions on Russia kicking in December, the anticipated surge in crude prices is likely to be hell on wheels amid persistent inflation and recessionary fears.  

Analysts are yet to pin down which is more harmful than the other — higher pump prices affecting consumption and demand or rising interest rates stoking financial bankruptcies and economic losses. The joint impact is too dreadful to imagine for the household world over. Truth be told, such engineered oil price shocks aren’t new. They have been an integral part of the industry since its birth, but oil politicking deepened during the 1970s. 

Prior to that, the oil cartel comprising major oil producers like Chevron, Amoco and Mobil had only two priorities — to keep oil production abundant and cheap for consumption. But in the late 1960s, countries like Iran, Iraq, Kuwait, Saudi Arabia and Venezuela nationalised their oil reserves and formed the Organization of Petroleum Exporting Countries (OPEC) amassing real supply power. In 1973, they first wielded their might cutting production, when Western countries supported Israel against Egypt and Syria. In no time, global oil prices shot up four-fold and since then there have been multiple instances when supply-led oil price shocks held the global economy by its throat. For an oil-importing economy like India the impact has been often acute.     

The first major blow came in early 1970s, when oil prices jumped 252% from $3.2 to $11.5 per barrel between December  1973 and 1974. Consequently, domestic fuel prices rose by 26.5% on average during the three years beginning 1973-74, increasing the oil import bill by 175%. This also meant the trade deficit shot up to Rs 438 crore in 1973-74 as against a surplus of Rs 103 crore the previous year. Making matters worse, the oil price shock was accentuated by two successive droughts leading to a significant decline in agricultural output. Needless to say, rising fuel prices and agricultural commodity prices edged up retail inflation to above 25%, sparking country-wide protests. 

The second episode followed just a few years later in 1979, when global crude prices increased by 130%, taking domestic fuel price inflation from an average of sub-4% in the three years before the crisis to an average of above 20% during the three years of the crisis beginning 1979-80, with a peak of 25.3% in 1980-81. 

We were barely recovering from the oil price rise, and another crisis fell upon us in 1990-91. Thanks to the Gulf crisis, the average price of India’s crude basket yet again doubled from $15 to $30 per barrel. As per the RBI, the direct adverse impact on the current account was estimated at Rs 5,180 crore! The Gulf crisis-led oil price shock exacerbated India’s woes and eventually threw us into a severe Balance of Payment crisis. Hikes in procurement prices as well as supply-demand imbalances in essential commodities like pulses, oilseeds and edibles oils further added to headline inflation.

Foreign currency reserves at $ 2.2 billion as of March 1991, equivalent to less than one month of imports, constrained imports. The sustained, double-digit rise of 13% in fuel prices during the first half of the 1990s left its impact not only directly, but also through the second-round effects. Even more disruptive price shocks occurred in 2008 when oil prices precipitated to $139 per barrel, amid rising demand and falling supply, followed by the 2010-2014 price shocks, when crude prices remained over $100 per barrel for a four-year stretch — the longest such period on record.

Though prices collapsed in late 2014, as per the World Bank, lower prices failed to deliver the boost to global growth that many had expected. Not all oil price shocks are caused by similar reasons. They could be demand or supply-driven, but the fact remains that high pump prices increase input costs for firms, reduce their profits and lowers output. On the demand side, high oil prices cut consumption and investment in the economy. Its effects turn lethal when imported inflation forces monetary policy tightening, causing exchange rate volatility and in turn affecting growth.

Countries like India keep a ceaseless vigil on oil, accounting for over 20% of its total import bill and contributing about 56% of the total trade deficit. In FY21, the average price of the Indian crude oil basket stood at $44.82 per barrel. In contrast, it’s estimated to average $100 per barrel or more during the current fiscal. Even as the central bank estimates headline inflation to retreat to sub-6%, oil prices could pose fresh trouble.

As it is, downstream oil marketing companies like IOCL, BPCL and HPCL couldn’t raise retail fuel prices in line with global prices, and Kotak Securities estimates they have incurred untold under-recoveries of nearly Rs 1 lakh crore in the past six months of the current fiscal. If the trend continues, under-recoveries will widen. Ironically, higher prices are not good for upstream firms like ONGC and OIL, given that the government has introduced the windfall tax, capping realisations at $75 per barrel.    

The good oil

For an oil-importing economy like India impact has been often acute. The first major blow came in the early 1970s when oil prices jumped 252% from $3.2 to $11.5 a barrel between Dec 1973 and 1974. 

[adinserter block=”4″]

[ad_2]

Source link

LEAVE A REPLY

Please enter your comment!
Please enter your name here