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Geopolitical tensions have created fresh fears of oil supply disruptions, resulting in high crude prices. According to Goldman Sachs, crude prices are likely to breach the $100/bbl mark in the third quarter of 2022. This isn’t good news for India. Mint explains:

What is the outlook for crude prices?

Crude prices have begun soaring to a multi-year high after the drone attacks by Houthi rebels of Yemen on targets in the United Arab Emirates (UAE). On 20 January, the Brent future hit a seven-year high of $88.3 per barrel, and the outlook remains bullish for crude futures. In addition, the growing presence of the Russian military at the Ukrainian border has raised red flags—the US has threatened serious implications in case of a Russian invasion. An escalation of the crisis would only exacerbate supply concerns and lift crude prices.

On the rise
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On the rise

Are other factors also driving up prices?

Strong demand, weak investment, and a lack of spare capacity are among other factors driving up prices. According to the International Energy Agency, worldwide oil demand has now recovered to pre-pandemic levels, but supply is short by at least a million barrels per day. Bank of Baroda says although the US can sell from its strategic petroleum reserve, its supply is limited: Crude inventories may have fallen to 593 million barrels, the lowest since November 2002. The brief outage of the Iraq-Turkey oil pipeline due to an explosion also caused a spike in oil prices recently.

What is the impact on the prices of ATF?

The cost of crude’s downstream products, including aviation turbine fuel (ATF), has increased and is expected to rise further. On 16 January, ATF prices rose 4.2%, taking the price in New Delhi to 79,294.91 per kilolitre. The pandemic-induced low demand and high fuel prices have been major concerns of the aviation industry which has for long sought relief in fuel rates.

What’s the larger picture?

India imports 85% of its domestic oil requirements. The import bill, therefore, will go up. Already, India’s oil import bill has more than doubled to $71.1 billion between April and November 2021. A $10 per barrel increase in crude raises India’s inflation rate by around 50 basis points and widens the fiscal deficit by about 40 basis points. Any crude price shock has a bearing on the Current Account Deficit (CAD) to gross domestic product (GDP) ratio that rises sharply even if the GDP itself is growing.

What about the duty structure?

Fuel prices are a politically sensitive subject. With several assembly elections approaching, oil companies have suspended fuel price revisions. Petrol and diesel prices have been static since 2 December even though crude has risen from $70.5 a barrel to $87.5 a barrel now. Every $1 increase in crude necessities a 50 paisa per litre hike in the prices of petrol and diesel. To keep fuel prices from rising post elections, both the Centre and states would need to cut excise duty and the value added tax (VAT) on fuel further.

 

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