There are multiple reasons for the sudden spike in crude rates. The Oil and Petroleum Exporting Countries (OPEC), including Russia and its allied countries has decided to put a squeeze on the supply.
China, after suffering from Covid-19 industrial slowdown the most, has started to increase its oil consumption. The oil consumption demand in US has also gone up. The rise in crude consumption in the US and China coupled with the decision by the OPEC to hold the crude production at the current level has threatened to push the crude rates.
India meets 85 per cent of its petroleum requirement through imports. The depreciation in rupee vis a vis US dollar may further inflate India’s oil import bill. At present, the exchange value of Indian rupee against US dollar is Rs83.
State-owned oil marketing companies (OMCs) have not revisited the rates since April 2022. The OMCs lose Rs5 for every litre of diesel that they sell while on petrol they make a profit of Rs1 only. With five states scheduled to go to polls later this year, to be followed by the General Elections in first half of 2024, the Centre is not likely to allow OMCs to increase the pump prices of fuel. But post elections, oil companies may not be restricted to raise fuel prices.
In the April-June quarter, state-owned oil firms made Rs8.60 profit on every litre of diesel they sold while they made a profit of Rs 9 on petrol. As international crude rates jumped in August and maintained the rising trend, their profits have disappeared. Since August, the crude rates have gone up by 10 USD. At present, the crude sells at 96USD.
A probable rise in fuel prices will have a cascading effect on prices of everyday consumables. The RBI maintained the repo rate (the rate at which commercial banks borrow from the RBI) and going forward, the bank may maintain its stance on the repo rate to maintain a check on the runaway rise in prices.
Any rise in the repo rate will have a deleterious impact on economic growth as a pricey interest rate will keep corporates off the banks. People will think twice before taking a credit from banks. People will cut down on their expenses –which will be a blow to economic growth.
At present, India has a comfortable position on forex. However, if the government taps onto this reserve, it will be a sure headache for the macro health of the economy.
India benefitted from the Russia-Ukrain conflict as Russia supplied crude to India at 68.17USD per barrel. However, Russia has refused to go ahead with the concessions. Last year, when international crude prices overshot 122USD per barrel, cheap oil supply from Russia insulated the country from the vagaries of the geo-political crisis.
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