Crude oil is on the boil again. After nearly two and half years of subdued crude oil prices aiding India’s fiscal situation by keeping LPG subsidies as well as petrol and diesel prices under check, the price at which Indian petroleum refineries buy crude oil is on the rise.

On November 7, the price of the Indian crude basket, the average rate of the various sources of crude oil for domestic refineries reached $62.83 per barrel, the highest level since June 2015.

The immediate result has been an increase in petrol and diesel prices. The rates of the transportation fuel are again inching to the levels they were at on October 3, when the government had to cut excise duty by Rs 2 a litre on the fuels to pacify an increasingly agitated population.

As per the daily price revision on Thursday, petrol cost Rs 69.85 per litre in Delhi, Rs 72.60 per litre in Kolkata, Rs 76.95 per litre in Mumbai and Rs 72.40 in Chennai. On October 3, when the government was forced to reduce excise duty by Rs 2 per litre, seen by many economists as a regressive step taken for populist reasons, the price of petrol in Delhi was Rs 70.88 per litre, in Kolkata it was Rs 73.62 per litre, in Mumbai it was Rs 79.99 per litre and in Chennai it was Rs 73.48 per litre.

At the time, economists estimated that the excise duty cut would lead to Rs 13,000 crore reduction in revenue earnings for the central government in fiscal 2017-18 alone.

The worrying sign for India is that the current rising trend in global crude oil prices have not yet seen its peak. Over the last one month, Brent crude prices, the benchmark used by India, has risen 14% to $63.52 per barrel.

While crude oil prices have been strengthening primarily due to the production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and some non-OPEC countries like Russia, the rally over the last week and half has also been driven by the political upheaval in Saudi Arabia, a country which supplies one in every nine barrels of crude produced globally.

On the orders of Crown Prince Mohammed bin Salman, Saudi Arabia has cracked down on a dozen princes of the royal family including the high profile investor Prince Alwaleed bin Talal, whose Kingdom Holdings has investments in Citibank, Apple, Twitter and several other top corporations across the world.

Analysts expect crude oil prices to keep rising. “Oil demand continues to grow, OPEC output stays restrained and there is little growth elsewhere. This raises the world’s reliance on shale, right when its limits are becoming apparent. To balance the market, oil prices need to stay higher than before. We raise our forecast to $63 per barrel by mid-’18,” wrote Morgan Stanley’s Martjin Rats and Amy Sergeant in a research note on November 6.

According to reports on Bloomberg and Reuters, some international analysts even predict crude oil price rising to $70 per barrel by 2018.

What does this mean for India? According to Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India, the country’s current account deficit could witness a widening. In a research note on November 8, he wrote, “…assuming that if the average oil price increases to $57/bbl (assuming average price of $62 per barrel in Nov 2017, $63 per barrel in Dec 2017 followed by $64 per barrel for the remaining three months of this fiscal) from the expected $55 per barrel, keeping other things constant the additional impact would be around 0.16% increase in current account deficit.”

Ghosh added that even an average annual $1 increase in oil price can lead to an increase in oil imports by $1,561 million, annually. The increase in global crude oil prices has already had an impact on India’s import bill which grew 21% to $7.5 billion in September 2017 while for the April-September 2017 period it increased 17% to $43.4 billion, as compared to the same period last year.

Ghosh also wrote that the government’s fiscal situation could be impacted if it decides on further cuts in the excise duty on petrol and diesel. “If Government goes for the same amount of excise duty cut (i.e. Rs 2 per litre cut in both petrol and diesel) once more in 2017 and again once in the first three months of 2018 then the combined revenue loss would be around Rs 20,000 crore for both the cuts. Hence the overall decline in revenue is around Rs 30,000-35,000 crore due to excise cut in FY18,” Ghosh wrote.

According to research note by credit rating agency ICRA, the fiscal position of the government would also get affected with increase in subsidy burden on domestic LPG and PDS kerosene. “Gross under-recoveries on sensitive petroleum products are expected to be higher at Rs 22,000 crore to Rs 25,000 crore (assuming average Indian crude basked averages at the price of $56-58 per barrel) as compared to our earlier estimates of Rs 16,000 crore to Rs 20,000 crore (average crude price of $50-55 per barrel) for FY2018,” the report said.

The note further added that every $1 per barrel rise in Indian crude basket, annual gross under-recoveries will increase by Rs 1,000 crore and net import bill by $1.2 billion.

However, there is a silver lining. Many international analysts are casting doubts on whether crude oil prices will sustain at $65-70 per barrel levels. On Wednesday, veteran oil markets analyst and chairman of industry consultant FGE, Fereidun Fesharaki told Bloomberg, “OPEC is good at holding the line when oil prices are low, but when prices are strong, the discipline can break down both in OPEC and non-OPEC.” Further, analysts also expect US shale oil production to increase at such levels of crude oil prices.

Further, in the short term the public sector oil refiners are also likely to gain, although a sustained period of higher oil prices will impact them adversely.

“The refiners are expected to benefit from inventory gains in the short-term due to increase in crude oil prices. However, in ICRA’s view, gross refining margins are expected to moderate over the medium term due to global refinery capacity additions, net of closures exceeding demand growth. Significant increase in crude oil prices has the potential to slow down global demand growth which could also adversely impact global crack spreads and thus, GRMs of the domestic refineries over the medium term.” said K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA.