Crude oil prices internationally showed a spurt recently, after a progressive decline since 2008. It has now firmed up around $50 to $60 per barrel judging by the way the global bench mark price of oil Brent crude has behaved. India buys and uses Brent Crude as the base for its basket of crude for calculating its oil import bill.
The question is whether India will stand to lose the advantage it had gained over the last few years as a result of the steady decline or slump in global crude prices since 2008. A look at the stats would show us where we stand. India's crude oil import bill nearly halved to $64 billion in 2015-16 fiscal as global oil prices slumped to record levels. India imported 202.1 million tonnes of crude oil in the fiscal year that ended March 31, for USD 64.4 billion, data available from Petroleum Ministry indicates.
Compare this with the import of 189.4 million tonnes of crude oil for $112.7 billion in the previous 2014-15 fiscal, the figures are higher because prices were almost $ 80 to the record $100 a barrel then. Calculated in terms of INR , the import of crude oil, which our refiners such as IOCL, HPCL, BPCL among others convert to fuels such as petrol, diesel and other variants, was Rs 4,18,931 crore in 2015-16, a sharp decline from Rs 6,87,416 crore a year ago.
Look at how the prices oscillated. The basket of crude oil India imports averaged $ 84.16 per barrel in 2014-15, but it cost only $ 46.17 a barrel in FY16. The oil import basket averaged an astronomical $105.52 per barrel in 2013-14, generating enormous pressures on the Indian economy as 70 to 80% of its import bill was constituted by crude oil imports.
Oil industry sources feel that the impact of the marginal price hike is also going to be marginal only for the refiners who have derived huge advantage in the last few years because of depressed oil prices. Notwithstanding the fact that the global oil slump also reduced India's selling price of its crude oil refined locally by ONGC and OIL India.
So on the one hand, if Indian refiners have to pay a higher price for crude to import , say $10 to $13 per barrel now, they will also realise a higher value for the crude they sell which will be above $7 a barrel and in the vicinity of about $10 and above.
The rise in import bill leading to greater outflow of resources in rupee terms by oil refiners and the higher amount they might realise by sale of their crude, may seem to square off at some point, but how much and what is the net gain or net loss, is something tricky to calculate at this point, given the pressures of the national oil companies. And the burden of subsidies they shoulder for slashing costs of kerosene and LPG.
The next question is if the recent spurt in oil prices and consequent rise in oil import bill will generate pressures on the economy which is struggling to peg its inflation rate at around 5%. Its common economics that it would but to what extent is the question because it all depends upon how much the refiners are able to absorb, considering the fact that they have now generated a substantial cash pile due to the depressed oil prices in the last five years and brought down their overheads.
The first casualty of any global oil prices is the transport sector in the country which has a cascading effect. Much of the commodities in the country are moved either by road or as freight by the railways, both of which use diesel as the lifeline fuel. If diesel prices go up, freight rates and road rates move up, immediately reflecting on the prices of commodities they move across the country.
Food inflation has been at unprecedented levels over the years especially reflecting in astronomical prices of pulses such as arhar dal and other variants. Veggie prices have also been oscillating depending on supply chain management. Basics such as potato, onions and tomatoes have fluctuated hitting the common man.
So the big question is, can oil refiners absorb the impact of the recent price hike and not pass it onto the consumers in terms of higher fuel prices. If they do, how will it affect commodity prices is the question and consequently food and general inflation.
Inflation will be under pressure shortly when government implements the pay commission report in terms of higher wages for government servants. More money in the hands of consumers means so much money coming into the market to buy goods and services.
This will generate inflationary pressures, but it would also kick start the manufacturing sector which is going through a comparative lull mainly because of the stress on cash flow in the economy and high lending rates. But this will ease as commercial banks are in a mood to drop lending rates as RBI is dropping the repo rates. Will the spurt in oil prices recently upset this apple cart is the moot question now? In a short term, the answer would seem to be a No.
While economists and oil industry experts generally believe that the spurt is a short term phenomenon and that India can weather the impact, the question is it so?
Why did global oil prices spurt? Firstly production in Canada and shale gas/oil output in the United States has declined substantially shrinking oil supplies. Secondly OPEC has taken up a proposal in its Algiers meeting last month to curtain production by about 0.7% to 2.2% annually. OPECs next meeting in November in Geneva will consider exact quantum of cut. Thirdly, Nigeria, which supplies to the western world especially USA, has seen production being hit as rebels have hit oil fields and government is negotiating with them for a stand-off in national interests.
Saudi Arabia and Iran, the war horses in OPEC, have been sparring over production cuts but this time around they might take a few million barrels off an already saturated market for mutual benefit. Even if production cuts are decided unilaterally, highly unlikely, how does OPEC, which does not have machinery, enforce it. The big guns in the OPEC are Saudi Arabia, Iran, Iraq, Venezuela, Brazil, and the others come under Nigeria, Libya etc.
De facto OPEC leader Saudi Arabia led by its highly influential Energy Minister , Khalid al-Falih, hinted strongly OPEC would go a step further in November to decide a production cut and freeze prices , something that didn't happen at the Algiers meet. "We need a gentle adjustment to reassure the market," The Wall Street Journal has quoted Falih as saying.
OPEC watchers are pessimistic about the group pushing through cut backs and sticking to them as it has remained a largely non-cohesive group. So don't expect an oil price spurt to stabilise at over $50 a barrel, say global oil experts.
If the global oil price is contained around $50 to $60, India could be in the safe zone with minimum impact on its economy, experts feel however adding that if the spurt continues beyond and reaches the price band of $90 in the next five years, as some international oil experts feel will happen, then India is in for trouble like many other nations. For the time being there seems to be no cause for concern.
By T N Ashok, Editorial Advisor, PreSense and Senior Economic Journalist at Delhi