How are the fuel prices behaving

New Delhi: Transportation fuel prices in the country touched a record high on Monday due to a spike in global crude oil prices and a fall in rupee. Diesel and petrol prices on 3 September reached ₹ 71.15 per litre and ₹ 79.15 per litre, respectively, in Delhi, a record high.

The spike in oil prices is due to a combination of factors such as President Donald Trump pulling the US out of a 2015 historic accord with energy-rich Iran and the rupee touching a new low at $71. So far this year, the rupee has weakened 11%, making it the worst performer among Asian currencies.

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Retail prices of petrol and diesel in India track the global prices of these auto fuels, not crude, although they are broadly linked to crude oil price trends, which have firmed up.

Any rally in global crude oil price will impact India’s oil import bill and trade deficit as every dollar increase in oil prices would impact import bill by around ₹ 10,700 crore on an annual basis.

The cost of the Indian basket of crude, which averaged $47.56 a barrel in 2016-17, rose to an average of $73.47 a barrel in July 2018, according to data from the Petroleum Planning and Analysis Cell, an arm of the oil ministry. Crude prices in Indian basket touched $75.25 a barrel in May. The price was $76.27 a barrel on 31 August. The Indian basket represents the average of Oman, Dubai and Brent crude.

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Lower oil prices had dramatically improved India’s terms of trade in 2015-16, thus boosting India’s gross domestic product (GDP). The Economic Survey has also made a case for policy vigilance to deal with downside risks stemming from rising crude oil prices.

“Global oil prices have risen by about 10% over the past two weeks on declining inventories and faster than anticipated decline in Iranian exports as the countdown to the enforcement of US sanctions begins... Accordingly, Iran’s exports are estimated to have fallen by 0.6 million barrels per day (mbd) in August from 2.3 mbd in July,” ICRA wrote in a report on Monday.

“As for the Rupee, it has depreciated by about 11% against the US dollar since the beginning of this calendar year owing to its sensitivity to crude oil prices and significant outflows of foreign investment,” added the ICRA report.

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India’s worry over crude oil prices stems from its energy needs being primarily met through imports—the country imported 214 million tonnes of crude oil in 2016-17. Extreme volatility has marked crude oil prices, which hit a record $147 per barrel in July 2009.

Oil imports rose by over 25% in FY18 to $109 billion from a year ago. Elevated oil prices could adversely impact India’s trade deficit and consequently, the current account deficit (CAD). High oil prices could also put pressure on the margins of oil marketing companies.