Oil Prices Rise

What is the issue?

• Crude oil prices have risen to their highest level since late-2014.
• In this backdrop, changes to the domestic fuel pricing regime have raised some concerns.

What is the recent development?

• Brent crude oil is the international benchmark price for oil.
• It was priced around $27 a barrel as late as January 2015.
• It has recently breached $75 per barrel.
• The price rise is driven by a deepening economic crisis in Venezuela.
• It is also a result of the fear of US's consideration on reimposing sanctions against Iran.

Why is it a concern for India?

• The price of the Indian basket of imported crude oil, too, has risen sharply.
• Worryingly, India primarily meets its energy needs through imports.
• Oil imports rose by over 25% in 2017-18 to $109 billion from a year ago.
• Elevated oil prices could affect India’s trade deficit.
• Consequently, the current account deficit could also increase.

How is the domestic fuel pricing regime?

• The Centre introduced the dynamic fuel pricing mechanism in June last year (2017).
• This allowed oil marketing companies (OMCs) to revise fuel prices daily.
• State-owned fuel retailers were revising the prices in tune with changes in international prices.
• Notably, the price of Brent crude oil has increased by more than 50% since June last year.
• It has risen to the highest level since late-2014.
• Responding to this, the government has recently asked public sector oil companies to pause their daily retail price revision.

• The oil companies have thus kept petrol and diesel prices unchanged for nearly two weeks.

• This is despite the rise in average price of the Indian basket of crude oil.

What are the implications?

• Oil companies - It has exerted pressure on the marketing margins of public sector oil companies.
• The average marketing margin has considerably gone down by about 45%.
• This would impact the oil companies as they may face a capital crunch.
• India’s oil exploration and refinery upgradation efforts could slow down.
• The performance of OMC stocks in the last few weeks also suggests that the markets are not convinced.
• Policy - The government has discretionarily stopped a market-linked pricing regime.
• Regardless of the reason, such an intervention undermines the credibility of its own policy decision.
• Worryingly, the decisions are largely influenced by political considerations such as elections.
• The policy of transferring the burden to the OMCs by offloading the burden on consumers is unsustainable in the long run.
• The government should opt to ease the burden of fuel taxes.
• A possible option is to bring domestic fuels under the purview of the goods and services tax.
• For now, the government could bring down prices by reducing excise duties on oil.

Source: Business Standard, The Hindu