Print Friendly, PDF & Email

Insights into Editorial: How the country should make the most of a second oil windfall

Strategic_Petroleum

Context:

Crude oil, caught in a spiral of demand destruction due to the coronavirus spread and oversupply worries from the unravelling of the OPEC-plus arrangement, has faced a major rout.

From about $65 a barrel in end-December, Brent oil has crashed to about $35 now a level last seen in early 2016.

The impact of Covid-19 will be felt on the global demand for oil, too, as a dramatic increase in Covid-19 cases has put further downward pressure on demand for commodities, including oil.

Thus, both supply and demand shocks have coalesced to roil the crude oil market. Since the start of the year, oil prices have fallen by about a third. Prices may drop further under the weight of the twin assault of higher supply and lower demand.

Price war for market share gains between Russia and Saudi Arabia:

The last two trading sessions have been particularly brutal for the fuel with Saudi Arabia and Russia, the prime players in the OPEC-plus group, refusing to extend their output cuts to stabilise already weak prices.

This has heralded a price war for market share gains, with the Saudis firing the first salvo and the Russians expected to retaliate.

The race to the bottom could result in many casualties among global oil producers, including the US shale oil industry.

Why India Need Strategic Petroleum Reserves?

India still needs to import 83% crude oil of its requirement which increase import bill of india which further widens the Current Account Deficit (CAD) of the country.

The fluctuations in the price of the crude oil in the international market create an atmosphere of uncertainty in the country.

So, in this way the economic condition of the country is dependent on the oil importing countries i.e. Gulf countries which does not suit to a sovereign country like India.

It is known that the current petroleum reserves of India are sufficient to fulfil just 13 days oil requirement of the country.

But this is not sufficient to tackle any unpredicted event occurs in the international crude market. So India want to have petroleum reserves of 90 days.

In order to ensure energy security for 90 days, India needs to build up additional petroleum reserves of 13.32 metric ton.

Declining of Oil prices: Impact on India:

  1. It is, therefore, not a stretch to expect oil prices over the coming financial year to be lower than they were in the previous two.
  2. This has positive implications for India’s economy and policymaking, as it comes at a time when it has embarked on an uncertain and hesitant recovery.
  3. A direct casualty is the ability of the government to spend or meet its fiscal commitments in the form of budgetary transfers to states, payment of dues and compensation for revenue shortfalls to state governments under the goods and services tax (GST) framework.
  4. India imports more than 83% of its oil needs, the price crash offers a breather on the macroeconomic front. According to estimates, a one-dollar decrease in crude oil price reduces the oil bill by around $1.6 billion per year.
  5. The collapse in oil prices will cut the country’s import bill, and soften its current account deficit.
  6. Budgetary constraints combined with the Fiscal Responsibility and Budget Management Act have held the government back from fully offsetting a private sector demand slowdown with its own spending.
  7. Low oil prices offer an opportunity to raise some revenue and improve its fiscal balance.
  8. Second, the additional tax revenue thus generated through higher excise duty should be used to clear all dues of the central government, whether to private companies, state governments, or others awaiting tax refunds.
  9. Putting cash back in the hands of households and small businesses will go a long way in maintaining the growth of domestic demand, besides improving the credibility of the Union government as a trustworthy counter-party.
  10. Third, the potential excise duty windfall from oil prices could come in handy for the government to provide relief to beleaguered telecom companies.
  11. The government will have fiscal leeway to allow a staggered and a longer schedule for the payments they have to make, arising out of the Supreme Court ruling on adjusted gross revenues.
  12. The fall in crude prices will also help ease inflationary pressures that have been building up over the past few months. This will increase the space for the monetary policy committee to ease rates further.

Government has to get its act together to reap the benefits in the long term:

Indian Strategic Petroleum Reserves Ltd is responsible for building buffers. Currently, it has 5.33 million tonnes of underground strategic reserve facility in Visakhapatnam, Mangaluru 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.

What works for India:

It is the age of globalization where the price of a product is determined by the demand-supply chain.

The interconnected nature of international oil markets makes disruptions in any given area likely to affect prices in much wider geography.

But does the price offer any comfort? Energy expert says, “Neither ultra-low nor ultra-high prices are good for India.

Prices that encourage growth in both the exporting Gulf countries and India are good for us; after all, nearly 10 million Indians work in the GCC countries, who send over $40 billion in remittances.”

Ultra-low prices may help India in the short run but can hurt in the medium to long run.

The opposition has urged the government to pass on the benefits of the low crude prices to the common man, by reducing the retail rates of petrol, diesel and cooking gas.

Conclusion:

As a summary, it can be said that construction of strategic petroleum reserves by India is a great way to secure country’s energy security.

These reserves would act like piggy bank for India in the event of war like situation in the gulf countries or other oil importers of India.

India wants to develop a transparent market for natural gas where the price is determined on an exchange. The aim is to increase the use of natural gas in India’s total energy mix from 6.5 percent to 15 percent between 2028 and 2030.

India must safeguard its renewable energy sector and redouble its efforts to gassify its economy.

These continue to be the best bets to power India into a more secure and green future. The present instability in the global oil market further underlines the need to move away from the energy sources of yesterday.