The fuel prices
in India seems to be heading northwards with little signs of reversal. They have
touched historical highs in recent times. The cascading effect of fuel price
rise on other goods would in all probability ensure inflation is headed northwards.
As inflation would breach the 6% benchmark, the outcome would obviously be a
tightening of the interest rates. This is something that India would want last
thing to happen. As the demand picks up albeit with uncertainty of fresh spurt
in COVID cases, there in all likelihood will see an increased demand for fuel. The
prices are likely to go up given the cut in production across the Middle East.
While India has sought to diversify its oil sources, the region continues to
depend heavily on the Middle East. The Saudis and their oil counterpart
countries do not seem to be in a mood to increase the production. To add, the
crisis in Yemen, an offshoot of which has been constant attack on oil fields in
Saudi Arabia and UAE by the Yemeni rebels have added to the woes in oil
production. There have been numerous suggestions to circumvent the rise in
prices and see some smoothening of the same, yet there seems little solution in
sight,
There has been a
suggestion of India making use of its strategic petroleum reserves (SPRs). While
the suggestion appears nice on paper, the fact is at peak demand, the reserves
barely will last a week or so. The bulk of the reserves are for the refining
the crude for the firms rather than something being of use in petro-retailing. Unlike
the US which might have reserves that lasts for a couple of months, India does
not have the luxury at this moment. It is no doubt that India purchased oil for
the reserves at very low prices. Yet the practicality of that is still to be
validated in the real life context. The reserves will have practical meaning
only if there exists enough of supplies to last for quite a few months,
something India has not reached yet. Furthermore, there is a drastic change in
the oil prices over the last one year. While the oil prices had hit negative
last March as the world began the experience the pandemic induced lockdown, the
recovery which is beginning to start across the world is witnessing increasing
demand for oil all over. While the pandemic crisis continues to cause concerns,
the fact that vaccine is available indicates the end game has begun.
Indian oil
prices have increased partly due to the rise in taxes. There was twofold motive
in the same. In the lockdown, if the emphasis was on social distancing, it
implied that people’s travel would have to reduce. This would in turn imply it
became costlier to travel. Thus the rise in oil prices was a natural corollary.
Secondly, given the shutdown, the economic activity had ceased to exist. This had
an impact on the tax revenues. Two good ways of recovering tax revenues were to
increase taxes on liquor and on fuel. Therefore, there was a high increase in
excise duty on fuel products. This has led to the rise in oil prices. The
increase in excise was both at central and state levels. While this was apparently
all right during the low international prices regime, the high prices have
accentuated the crisis. The bulk of the oil price, if decomposed would go for
taxes rather than international imports or refining value add or transportation
and storage costs. Therefore, there does exist merit to reduce the taxes. Yet in
the times of the pandemic, with economic activity still to gain traction in
toto, the excise on fuel continue to be the critical source of revenue for the
governments. Hence they are unlikely to taka action on this front. Moreover,
interestingly, the high oil prices hardly seem to be an issue in the elections
being held in five states and union territory. While in political terms, this
is something different, in market terms, this adds to the government perception
of markets dictating prices rather than subsidised prices generating burden on
future generations. It is pertinent to note lot of old unpaid subsidies are
being cleared both in oil and food front. This clean-up of balance sheet too
adds to the price increase at this moment.
The long term solution
would have to diversify the energy sources. The energy security basket cannot
be dependent on the primacy of oil which is produced overseas. Any disruption
in the Middle East would leave India imperilled. In fact, there are schools of
thought which argue that high oil prices might actually prove beneficial in
disguise since they would spur innovation. The American automobile culture was
an outcome of cheap oil prices, something that hit a reality check in the crisis
of 1973. If the oil were to remain high, the society would find in its self-interest
to discover alternative sources of energy. In times of cheap oil, there is
little incentive for the same unless the alternative source would be priced
less than oil. This might not happen given the life cycle of the fuel which
would reduce in prices only with passage of time. Therefore, India must
consolidate itself in terms of building capacity in non-oil based fuel sources.
These might be solar or wind or hydel or coal. They might or might not be
renewable but what is of importance is they need to be produced in India. Nuclear
seems another option though the debate is raging on its long term safety basis.
India has managed to diversify some sources. The solar power generation has
increased over the last few years. There has been an emphasis on hydro-power
and wind-power in recent times. Yet these have a long way to go. While hydro
power has been time tested, and so has been thermal power, the solar and wind
power are yet untested in terms of inter-temporal consistency. The oil is
something still critical in automobiles and electric vehicles are still in
infancy. They might be on a path of exaggerated expectations but they would
have to pass through the trough of disillusionment before embarking on a path
to maturity. The curve might be steep and pretty long. Indian oil problem by
and large lie in the transport sector, both public and private. At this moment,
however, they will have to keep using oil as their primary fuel. Until there
emerges some new alternative, India will have to go through these oil price
peaks every now and then.
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