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25 February 2021, Gateway House

Oil Prices: India’s Missed Opportunities

Fuel prices are at an all-time high in India this month, even after the country benefitted from 5 years of low crude oil prices. Amit Bhandari, Fellow, Energy and Environment Studies Programme, explains why fuel prices are high and how the Government of India could have prevented this ongoing crisis.

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Aliasger Bootwalla (AA): Welcome to GH Podcast. This is Aliasger Bootwalla, Media and Outreach Associate, Gateway House.

Fuel prices in India are at an all-time high. Petrol prices are at Rs. 97 per litre while the price of diesel is at Rs. 88 per litre. OPEC had cut the production in 2020 due to the drop in demand because of the global pandemic. This led to a sharp decrease in crude oil prices, which averaged at $33/barrel last year. OPEC’s decision to decrease the supply in 2021, even though the demand for crude oil is on the rises, has increased crude oil barrel prices from around $45 in the beginning of this year to over $60. in the past five years.

India has been benefitting from low crude oil prices, but has failed to take advantage from the long-term perspective. Thus, we find ourselves in a situation where petrol prices have reached a triple digit figure. Today we have our Fellow for Energy and Environment Studies Programme, Mr. Amit Bhandari who will speak on how India could have leveraged on low oil prices.

Amit, why is fuel in India so expensive? Is it directly related to the crude oil prices or is any other reason as well?

Amit Bhandari (AB): There are two parts to the price of oil. The first is the price of raw material which is crude oil – the key material to producing petrol and diesel. The prices of crude prices have gone up in past few months from $40 a barrel to $60 a barrel. But in India, crude oil accounts only of 1/3rd of the final product like petrol and diesel. Petrol prices in most Indian cites range between Rs. 80 to Rs.95. Hence a litre, broadly corresponds to $200 a barrel. Therefore it is clear that crude oil accounts to 1/3rd of the prices, and the remining 2/3rd of the price is coming from central and state government taxes.

In the early days of COVID-19, oil prices had fallen sharply and instead of bringing the prices down, the government kept prices constant and the extra money was retainedin form of additional taxes.  What the government should have done instead was that as the oil prices increase, the government should have cut the taxes and kept the same oil prices. The government has instead kept the taxes constant and hence the retail price has gone up in the last 7 or 8 months. One factor for this is that the taxpayer base in India is very small and so the direct taxes are very low. Therefore, indirect taxes like this are needed but I think in the present case the extent of taxes have become too high.

AA: What could the Government of India have done when the fuel prices were still low? Were there any measures the government could have taken to prevent the current fuel price crisis? 

AB: India imports almost 1.4 billion barrels of oil every year. This number is not going to change quickly. So what can India do about fluctuation in energy prices. Indian companies have tried acquiring oil fields overseas. For example, ONGC acquiring oil fields in Russia, Venezuela, Sudan and other countries. It is important to note that all of this covers only 10% of India’s oil consumption.

The real worry for India is not the physical supply for oil but the high price. We will continue importing the oil, we need but instead of $40, we will have to pay $60 or $80. Our problem is financial and not physical supply. Therefore, our answer has to be financial.

There are two parts to this. First is that oil rich countries like Norway and Saudi Arabia have set up provident wealth funds which invest in non-oil assets to insulate the countries’ budget against lower oil prices. So, India can follow a reverse approach to this. We can set-up a sovereign wealth fund that will invest in oil assets which will protect us when prices go up. For example, last year, when the oil prices were low, an Indian wealth fund could have invested in companies like Saudi Aramco and ExxonMobil. The dividends from these will have partly made up for the higher price of the oil which we are paying now.

The second part which we could have approached is that when oil prices are at a 20 year low i.e. when they are $30-$35, levels which you don’t expect to sustain. At these points India can use the financial markets and buy the long dated call options for oil. A call option is the right but not an obligation to get the asset at the predetermined price. Hence, if the oil is at $35 and you are able to buy call options at $50 a barrel, that will ensure that you do not to pay more than $50 a barrel come what may for the duration you have contracted

AA: In 2019 you had recommended an establishment of a Petro Rupee. Can you explain how that will work and is it still a viable option for India?

AB: Oil, like any other commodities is traded on an exchange and that is how prices are set. As of now most of the financial trade in oil is conducted on western exchanges  and using western benchmarks like Brent and WTI and in the western currency – U.S. Dollar.

The problem is that these trades represent the oil demand pattern of 1970s and 1980s, when the west accounted for most of the global oil consumption and oil trade. The pattern has now shifted from west to Asian countries. Hence, there is potential to trade oil on an Indian exchange, in an Indian rupee. This will help create a transparent benchmark and which will be more representative of the current demand and price patterns. This type of transparent pricing mechanism can only benefit producers and consumers as well. Such trade will also help India because of transparent prices. Additionally, a commodity exchange in India will create thousands of Job opportunities and finally it will also make India a more central player in the Global Financial Order and in the Global Energy Market.

Produced by Aliasger Bootwalla and Saloni Rao
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