With Brent crude hovering around $83 a barrel, oil marketing companies (OMCs) are apprehensive that users will migrate to low-cost alternative green energy sources. Oil prices rose on Monday after Saudi Arabia’s state-owned oil producer Aramco raised the official selling price for its crude amid tighter supplies. Brent crude was up 71 cents, or 0.83%, at $83.44 a barrel on Monday, after dropping nearly 2% last week. The price had touched a three-year high of $86.10 in October after oil-producing countries refused to increase output in line with rising demand.
The price should ideally be in the range of $45-60 a barrel, says Arun Kumar Singh, chairman and managing director, BPCL. "Too high crude prices will hurt even suppliers in the long run as it will lead to lower consumption and demand. If the price is too low, companies will stop investments and innovations and that will hurt the industry."
Mukesh Kumar Surana, CMD, HPCL, says high oil prices affect both producers and consumers. "In such a situation, other forms of energy will be more attractive if those are economical to use. It will destroy the future demand for oil permanently, so it's not good for producers."
According to Surana, a high oil-consuming country like India requires reasonable crude pricing to ensure that the price movement doesn’t impact economic growth. "In my opinion, a price range of $60-70 is reasonable for both the producer and the consumer. Anything beyond $70 will hurt consumers. It brings some sluggishness in demand, especially when economies are trying to reboot after the Covid-19 pandemic," he says.
"If irresponsible pricing continues by reducing the quantity, alternative sources of energy will emerge. Necessity is the mother of invention. They can push hard for keeping prices up for 7-8 months, not beyond that," says Singh of BPCL.
Surana says an emerging economy like India will need multiple sources of energy to boost growth. At present, the country is investing heavily in renewable energy and green hydrogen to address future energy requirements.
Following the rise in global crude prices, petrol and diesel rates in Mumbai hit a record ₹113 a litre and ₹104 a litre, respectively, a couple of weeks ago. Last week, The Centre reduced the excise duty by ₹5 on petrol and ₹10 on diesel to offset the impact of rising crude prices. The reduction in duty will lead to a revenue loss of ₹45,000 crore, or 0.2% of GDP, in the remaining months of FY22, according to research and broking company Nomura. Following the Central government's decision, most states and union territories also slashed the value-added tax (VAT) on petrol and diesel. The move is likely to result in huge revenue losses for the exchequer, especially at a time when the economy is still recovering from the impact of Covid-19.
The Organisation of Petroleum Exporting Countries (OPEC) and its allies recently decided to continue with their current crude production plan despite pressure from consumers such as the US, India and Japan. Crude-producing countries will rollover their August plan to gradually increase oil production by 400,000 barrels per day, every month.
The cut in excise duty on petrol and diesel will, however, help address inflation concerns to some extent. Petrol has a 2.2% weightage in the consumer price inflation (CPI) basket, while diesel has 0.15%.
High crude prices are a negative for India, which imports around 86% of its annual crude oil requirement. The country's foreign currency outflow will increase with rising crude prices. A higher price also increases pressure on inflation and interest rates, and affects passenger vehicle sales. However, the strengthening of the rupee against the dollar gives some respite. The Indian currency increased to 74.09 from 75.48 on October 12.
Higher fuel prices also limit consumer spending and the government's income from taxes. At the macro level, it affects fiscal deficit, external borrowings and debt position. Higher oil prices add to short-term fiscal pressures. The government has pegged the fiscal deficit at 6.8% of GDP, or ₹15,06,812 crore, for the current fiscal.