The artificial increase in crude oil prices has shocked the entire world by tampering with the planned budgets of various developing countries like India and China. The cushion of low oil prices that we have been enjoying since 2014 has been terminated by several geopolitical considerations plaguing the world politics today. Even though the duration for this artificial push in prices may be momentary but it may leave a long-term impact on the growth of world economy.
Global politics of oil –
As President Donald Trump mentioned in a tweet, the recent increase in oil prices is artificially constructed to benefit the oil dependent economies. But there are other manifestations to this crude oil shock. The primary reason for the increase in prices may be attributed to the collusion between Saudi Arabia and Russia to cut down supply of oil to maintain competitive oil prices in the global market, so as to finance their domestic economies which are massively dependent on oil. Looking at the history, we cannot deny the news reports of American involvement in this artificial push to gain out of increased oil prices in terms of making domestic oil companies price competitive and introduce shale as an alternative to crude oil (both domestically and internationally) at increased prices. The scrapping of JCPOA and economic sanctions on Venezuela can be seen as the developments in this direction. This artificial increase in oil prices would ultimately fund the unholy wars against Yemen and Syria while facilitating the possibility of a conflict with Iran in the near future. To tackle these unfavourable and unilateral sanctions, India and China should join hands to resist this international injustice meted out against the developing economies.
Politics of oil in India –
The ruling alliance at the centre is accused of imposing an informal freeze on oil prices during Karnataka (provincial) elections to secure popular support. This freeze was orchestrated despite the policy of unregulated oil prices in India. The accumulated pressure which was built up during the run-up to Karnataka elections had to be vented out with a steep increase in oil prices after the elections. Any such informal tampering by authoritative directions to oil marketing companies disturb the economics of oil by hurting the investor sentiment. At the same time, a trend has been observed in India wherein the import value of oil is going up but the exports (in value) are not showing similar trends. It is said that the private sector refineries in India are not exporting oil abroad and retaining the commodity for domestic consumption because of favourable pricing policies in domestic market. We should also remember that Indian oil marketing companies determine the oil prices in unison i.e. following the oligopoly pattern of industry. In this case, the Competition Commission of India should look into this matter and take appropriate action to ensure the establishment of a competitive oil market in India.
Economics of oil in India –
In India, the central government is facing heat over maintaining high excise duties (taxes) on petroleum products to finance its fiscal capacity, whereas the centre is passing the buck on state governments for not reducing their share of taxes (VAT). To be clear, the extent of revenue made from petroleum products in India goes to the level where 16 percent of the combined revenues of all the state governments in India come from the petroleum products alone. Similarly, 30 percent of all the revenues arising out of indirect taxes of the central government generally arise from the basket of petroleum products only. This means that even a minuscule cut of Re 1/- in excise duty by the centre could shelve off a whopping Rs 13,000 crores from the central government revenues. Similarly, a cut of Rs 2/- in excise duty would cost the reduction of Rs 26,000 crores from the central coffers which is about 0.4% of GDP of India. Therefore, it is advisable to the central government to stick to its planned threshold of $80 per barrel crude oil price to get into action of reducing the excise duties on petroleum products. As the current oil prices (Indian crude oil basket) revolves around less than $70 per barrel, the government should face the political heat in the interests of larger good for the economy, which if violated may push the entire country into a payments crisis situation and negatively impact its current account and fiscal deficit.
Lessons for India –
It is typical of Indian government to firefight an issue during crisis while staying asleep during the normal times. We have missed the crucial phase of low oil prices and in today’s crisis situation we are back to the old cry over reforms that we could have taken to handle this situation effectively. I hope that the government would seriously take lessons out of this temporary crisis. First of all, we need to shed away our habit of imposing socialist controls for political gains. We should truly liberate the oil prices to follow the policy of unregulated oil prices in letter and spirit and let the economy follow its own course. Secondly, we need to increase the efficiency of our oil refineries which are wasting as high as 9 percent of oil during the refining process. The third lesson is complicatedly linked with the second suggestion. We have been following the policy of trade parity prices (TPP) on the basis of assumption that 80 percent of oil would be imported while the remaining 20 percent of oil would be exported to maintain an effective trade policy. This policy determines the dealer price at which the government sells oil to refineries. The refinery gate prices (RGP) for petroleum products are following this model of TPP which incentivises inefficiency in refining process by compensating the costs of refineries. The result of this policy is that our refineries have become stagnant in increasing efficiency through investments in technology upgradation. In reality, this policy was an outcome of controlled prices regime which we have left behind recently. Since we have moved to deregulated oil prices regime, this policy of trade parity prices (TPP) should be dismantled to allow the emergence of true competition in the market for refineries so they will compete with one another for market share. The government should also explore and rectify the discrepancies in domestic price regime that incentivises domestic consumption of oil more than the export of petroleum products.
In the short term, it is highly advisable for the government to take the political heat over excise duties and refrain from initiating any cut in the same. If it succumbs to popular pressure, we may fall into the fiscal deficit trap at the end of the year which would be much serious and difficult to handle than this temporary phase of artificially bloated crude oil prices. The ‘crude’ shock is temporary, we should not carry its baggage into our future.