In a way, this government has been lucky. When the government came to power in 2014, it also marked the beginning of one of the longest bear markets in oil. Between October 2014 and February 2016, the price of Brent Crude slipped from $110/bbl to $29/bbl. Despite attempts by the OPEC and Russia to keep prices buoyant with supply cuts since 2017, oil prices never managed to reclaim old high levels. Again in 2020, when the Indian economy was under stress and the budget was going out of control, oil prices again came to the rescue. The decision by Saudi Arabia to walk out of the Russia deal led to oil prices crashing sharply. This resulted in another opportunity for India. Can India make the best of this opportunity?
How India can make the best of this oil opportunity?
The bottom line is that the government of India has to get its act together to reap the benefits in the long term. Short term benefits are easier to realize. It is the long term strategy to ensure proper transfer of wealth from the oil producers to the oil consumers that will really matter. In short as we said earlier, crude oil prices appear to favour Modi government, which has been facing a lot of flak of late for the country’s economic situation. Government needs to ensure that it does not become another case of missed opportunity. Here is the narrative on oil for India.
- The oil price crash has come at an inopportune time for the energy-hungry and import-dependent Asian economies. While it reduces the cost of importing oil, it also means there is a global slowdown in the offing and that is not great news for the growth of trade and commerce.
- The oil price crash may only provide marginal and temporary relief. However, the bigger negative impact is going to be the Coronavirus and oil prices falling is no match for the debilitating economic impact of the Coronavirus.
- It is therefore very likely that this could in all likelihood be a case of a lost opportunity as it is unlikely to spur consumption. The consumers will not really benefit as most of the benefits will accrue to the government in the form of higher excise duties.
- Where India really lost out in this case was its unpreparedness on the storage front. India hardly made full use of the capacity it had built to create strategic petroleum reserves. Economic uncertainty is a huge dampener on spending and ideally should have been used to fill up the strategic storage infrastructure. However, with the economic constraints, now that cannot be done when oil is dirt cheap.
- Indian Strategic Petroleum Reserves are to the tune of 5.33 million tonnes of underground strategic reserve facility in Visakhapatnam, Mangalore and Padur (Karnataka), while another 6.5 mt facility is coming up at Padur and Chandikhole (Odisha). Work on two more facilities — at Bikaner in Rajasthan and Rajkot in Gujarat — will be initiated soon. But the low oil prices may not last till then.
- Energy experts aver that neither ultra-low nor ultra-high prices are good for India. Ideally, India should have equilibrium oil prices that encourage growth in both the exporting Gulf countries and in India. The Gulf has nearly 10 million Indians in the GCC countries put together who send over $45 billion in remittances each year. That cannot be compromised with very low oil prices.
- Cheap oil also has political ramifications. For example, the principal opposition part is asking the government to pass on the benefits to consumers. That is not being done as most of the benefits of lower oil prices are being skimmed away in the form of higher excise duties.
- Even economists have been urging the government must pass on the advantage of record low crude oil prices to help beat the current stagflation (rising inflation combined with economic slowdown). If you look at oil in dollar terms, it is down to the level it was at in 2004. That benefit must reach the consumers for a consumption boost to the India GDP story. In fact, central excise duty has been hiked more than a dozen times since the BJP came to power; by 218% on petrol and by 458% on diesel since May 2014.
Government must urgently focus on two areas; passing on benefits and building strategic petroleum reserves. Otherwise, the real dividends of weak oil prices may have been frittered [email protected]